SCANNING DECEMBER 2017

European Regulatory Watch Newsletter


Summary

EUROPE

AML/CFT - ESAs publish Final Draft RTS relating to 3rd country restrictions of group wide policies

  • Background

    On 20 May 2015, the European Parliament (the "Parliament") and the Council issued the directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the "AMLD IV", available here). The AMLD IV applies to obliged entities, for instance, credit and financial institutions, as listed in its Article 2 (the "Obliged Entities") since 26 June 2017.

    Article 8 of the AMLD IV requires the Obliged Entities to put in place anti-money laundering and countering the financial terrorism ("AML/CFT") policies, controls and procedures to mitigate and manage respective risks to which they are exposed. The development of these measures shall include model risk management practices, customer due diligence, reporting, record keeping, internal control, compliance management and employee screening.

    Where an Obliged Entity is part of a group, Article 45 of the AMLD IV requires implementation of group wide policies and procedures, including data protection measures for sharing information within the group for AML/CFT purposes. Those policies and procedures shall be implemented effectively at the level of branches and majority-owned subsidiaries not only in the EU Member States but also in the 3rd countries. If the minimum AML/CFT requirements in these 3rd countries are less strict than those of the EU Member States, then the requirements of the EU Member States shall be implemented to the extent that the 3rd country’s law allows it. Where it does not, the Obliged Entities must take steps to handle the resultant risk. These steps are not specified in AMLD IV.

    Article 46(6) of the ALMD IV requires the European Supervisory Authorities (the "ESAs") to develop draft regulatory technical standards ("RTS") detailing the steps to take in circumstance when a 3rd country's law does not permit the application of the required policies and procedures.

    On 31 May 2017, the ESAs published a consultation paper on its enclosed draft joint RTS on measures to take to mitigate AML/CFT risks where a 3rd country’s law does not permit the application of group-wide policies and procedures under Article 45(6) of AMLD IV (JC 2017 25 – the "CP ", available here).

    What's new?

    On 6 December 2017, the ESAs published final draft RTS under Article 45(6) of AMLD IV (JC 2017 25, the "Final Draft RTS").  The general AML/CFT provisions of the Final Draft RTS state that for each 3rd country the Obliged Entities shall at least:

    • Assess the risks to group, record and update the assessment to be able to share with a competent authority;
    • Ensure that risks are reflected in group wide policies and procedures;
    • Obtain management approval for the assessment as well as for the policies and procedures;
    • Ensure training of staff members in the 3rd countries.

    The Final Draft RTS lay down additional measures, including minimum action to take for achieving AML/CFT objectives where a 3rd country's law does not permit the implementation of group-wide policies and procedures related to:

    • Access to relevant customer and beneficial ownership information for due diligence purposes;
    • Sharing or processing of customer data for AML/CFT purposes within the group;
    • Disclosure of information related to suspicious transactions;
    • Transfer of customer data to EU Member States for AML/CFT supervision;
    • Application of certain recordkeeping measures of AMLD IV.

    The Final Draft RTS are available here.

    What's next?

    The ESAs will submit the Final Draft RTS to the European Commission for approval before being published in the OJEU.

    The Final Draft RTS anticipate that the final Regulation with regard to the Final Draft RTS (the "Regulation") shall enter into force on the 20th day [If urgent entry into force necessary, then "3rd day following publication" should be the choice. "The day following" should only be used in extreme urgency] following that of its publication in the OJEU.

    The Regulation shall apply from 3 months after its entry into force.

  • CRD IV/CRR and MiFID II/MiFIR - Commission proposes rules to amend the prudential framework for investment firms

  • Background

    At EU level, investment firms are currently subject to the same prudential rules as credit institutions (i.e. the Capital Requirements Regulation or "CRR", available here, and the Capital Requirements Directive or "CRD", available here).

    The prudential framework for investment firms in the CRD IV/CRR will work in conjunction as of 3 January 2018 with the MiFID II (available here) and MiFIR framework (available here), which sets out in particular the conditions for the authorisation of investment firms.

    As the current prudential rules in the CRD IV/CRR were mostly developed for (large) banks, which are based on international standards issued by the Basel Committee on Banking Supervisions ("BCBS"), these rules do not fully take into account the different business profiles and risks of investment firms.

    Against this background and in response to the European Commission's (the "Commission") first call for advice of December 2014, the EBA and the ESMA published their report on investment firms in December 2015, which recommended that only systemic firms remain in the CRD IV/CRR and that a revised prudential framework be designed for all non-systemic investment firms (EBA/Op/2015/20, available here). After a second call for advice from the Commission, the EBA issued for public consultation a discussion paper on the design of a revised prudential regime for investment firms on 4 November (EBA/DP/2016/02, available here). On 29 September 2017, the EBA submitted its final opinion on a new prudential regime non-systemic investment firms to the Commission (EBA/Op/2017/11, available here).

    What's new?

    On 20 December 2017, the Commission published the following 2 proposals amending the prudential framework for investment firms (collectively the "Proposals"):

    • Proposal for a regulation of the European Parliament and of the Council on the prudential requirements of investment firms and amending CRR, MiFIR and the EBA Regulation No 1093/2010 (COM(2017) 790 final – the "Regulation Proposal", available here).
      • The Regulation Proposal sets out mostly requirements in terms of own funds, levels of minimum capital, concentration risk, liquidity, reporting and public disclosure for all investment firms that are not systemic (divided into class 2 or class 3 firms depending on specific thresholds);
      • The Regulation Proposal amends in particular the definition of "credit institutions" in Article 4(1)(1) of CRR, which would grant the status of credit institutions to large investment firms which carry out the activities referred to in points (3) and (6) of section A of annex 1 to MiFID II and have assets above EUR 30 billion. These large investment firms of systemic importance (class 1 firms) would continue applying the CRD IV/CRR and would be fully subject to the prudential and supervisory requirements applicable to credit institutions.
    • Proposal for a directive of the European Parliament and of the Council on the prudential supervision of investment firms and amending CRD IV and MiFID II (COM(2017) 791 final – the "Directive Proposal", available here).
      • The Directive Proposal sets out mostly requirements for the appointment of prudential supervisory authorities, the initial capital of investment firms, the supervisory powers and tools for the prudential supervision of investment firms by the competent authorities ("CAs"), and the publication requirements for CAs in the field of prudential regulation and supervision;
      • The Directive Proposal would apply to all investment firms covered by MiFID II;
      • The Directive Proposal contains complementary provisions to the Regulation Proposal on the process for seeking authorisation as a credit institution (for systemic investment firms).

    The FAQ on the Proposals is available here.

    The Factsheet on the Proposals is available here.

    What's next?

    In order to facilitate a smooth transition for investment firms into the new regime introduced by the Proposals, capital requirements would be subject to a transitional period of 5 years.

    The Proposals will be discussed by the European Parliament and the Council of the EU. Once adopted, an implementation period of 18 months for the new prudential regime for investment firms is foreseen.

  • CSDR - ESMA updates its Q&As

  • Background

    The Regulation (EU) No 909/2014 on Central Securities Depositories entered into force on 17 September 2014 ("CSDR", available here).

    The purpose of this Q&As document is to promote common supervisory approaches and practices in the application of CSDR. It provides responses to questions posed by the general public, market participants and NCAs in relation to the practical application of CSDR.

    It is addressed to NCAs under the CSDR to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by the ESMA. It should also help, CSDs, their participants, investors and other market participants by providing clarity on the implementation of CSDR requirements.

    What's new?

    On 14 December 2017, the ESMA updated its Question and Answers ("Q&As") document on the implementation of the CSDR.

    The two new questions refer to organisational requirements.

    The ESMA clarifies that members of a user committee should be elected among issuers and participants of the relevant securities settlement system operated by a CSD. An agent of issuers or participants can be a member of a user committee in that capacity, under the following conditions:

    • Where there are clear rules for management of conflict of interests (in particular with respect to the agent’s other clients), and
    • If at some point during its membership at the user committee, its mandate is terminated, or its principal terminates its contract with the CSD, such agent should no longer be a member of that user committee.

    The ESMA also clarifies that a CSD should keep records of the settlement banks which have a contractual relationship with the CSD or which are known to the CSD in relation to the provision of services by the CSD to participants or issuers.

    The ESMA Q&A on the implementation of the CSDR is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • ELTIF Regulation - Commission publishes Draft Delegated Regulation

  • Background

    The Regulation (EU) No 2015/760 of the European Parliament (the "Parliament") and of the Council on European long-term investment funds is applicable since 9 December 2015 (the "ELTIF Regulation", available here). It establishes a uniform set of rules for the authorisation, eligible investment assets, diversification and concentration, redemptions, distribution of proceeds and capital, transparency, requirements for retail investors and marketing passport for ELTIFs.

    ELTIFs may only be EU alternative investment funds and may only be managed by EU alternative investment fund managers authorised in accordance with the Directive 2011/61/EU which is applicable since 22 July 2013 (the "AIFMD", available here). As a reminder, an ELTIF must invest at least 70% of its capital in eligible investment assets such as long-term infrastructure projects, roll-out of new technologies and SMEs and assets referred to in Article 50(1) of the Directive 2009/65/EC (the "UCITS Directive", available here). An ELTIF may not offer redemption rights before the end of its life.

    Articles 9(3), 18(7), 21(3), 25(3) and 26(2) of the ELTIF Regulation provide that the European Securities and Markets Authority (the "ESMA") shall develop draft regulatory technical standards ("RTS") to determine the criteria for establishing the circumstances in which the use of financial derivative instruments solely serves hedging purposes, the circumstances in which the life of an ELTIF is considered sufficient in length, the criteria to be used for certain elements of the itemised schedule for the orderly disposal of the ELTIF assets, the costs disclosure and the facilities available to retail investors.

    In order to develop the draft RTS under the ELTIF Regulation, from 31 July to 14 October 2015, the ESMA conducted an open public consultation (the "Consultation Paper and Responses" are available here). On 8 June 2016, the ESMA submitted its final draft RTS combining strongly interconnected RTS developed under Articles 9(3), 18(7), 21(3) and 26(2) of the ELTIF Regulation to the European Commission (the "Commission") for endorsement (ESMA/2016/935 – the "Draft RTS", available here).

    What's new?

    On 4 December 2017, based on the Draft RTS, the Commission published its draft Delegated Regulation (EU) …/… supplementing the ELTIF Regulation (C(2017) 7967 final, the "Draft Regulation"). The Draft Regulation:

    • Specifies in which circumstances the use of financial derivative instruments qualifies as solely serving the purpose of hedging the risks inherent to the investments;
    • Specifies when the ELTIF life-cycle is considered sufficient in length so that each asset can be disposed within;
    • Specifies the elements and risks related to each ELTIF underlying assets which an ELTIF manager must take into account in the assessment of the market for potential buyers;
    • Establishes the criteria to be considered with regard to the valuation of the assets to be divested in order to include an appropriate value in the schedule for the orderly disposal of the ELTIF assets;
    • Specifies the characteristics and functions of the facilities to be put in place by the manager of an ELTIF marketed to retail investors.

    The Draft Regulation is available here.

    What's next?

    The Draft Regulation is subject to the right of the Parliament and the Council of the EU to express objections.

    The requirement on the sufficient length of the life of the ELTIF is deemed to be fulfilled under the Draft Regulation by the ELTIFs already authorised under the ELTIF Regulation before the entry into force of the Draft Regulation.

    The final version of the Draft Regulation shall enter into force on the 20th day following that of its publication in the OJEU.

    In order to allow competent authorities and managers of the ELTIFs authorised under the ELTIF Regulation before the entry into force of the Draft Regulation to comply with the new requirements contained in the Draft Regulation, the date of application of the Draft Regulation shall be 1 year after its entry into force.

  • EMIR - ESAs communicate on variation margin exchange for physically-settled FX forwards

  • Background

    The Commission delegated regulation (EU) 2016/2251 supplementing Regulation (EU) No 648/2012 on OTC derivatives, central counterparties ("CCPs") and trade repositories ("EMIR", available here) with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a CCP entered into force on 4 January 2017 (the "RTS", available here).

    Pursuant to Article 11(2) of EMIR, financial counterparties and non-financial counterparties referred to in Article 10 of EMIR shall mark-to-market on a daily basis the value of outstanding contracts.

    Having regard to Articles 27(a) and 37(2)(b) of the RTS, counterparties shall exchange variation margin ("VM", as defined under Article 1(2) of the RTS) without initial margin (by a way of derogation from Article 2(2) of the RTS), consistent most notably with the BCBS-IOSCO framework, for physically-settled foreign exchange ("FX") contracts by 3 January 2018. In this context, FX forwards are defined as 'physically-settled OTC derivative contracts that solely involve the exchange of two different currencies on a specific future date at a fixed rate agreed on the trade date of the contract covering the exchange'.

    Against this background, the ESAs have been made aware of implementation challenges for certain counterparties to exchange VM for physically-settled FX forwards by 3 January 2018, mostly regarding transactions with certain end-users. In addition, it became apparent that the adoption of international standards in other jurisdictions via supervisory guidance has led to a scope of application that is more limited than the scope the ESAs have proposed (in the RTS). From a legal perspective, neither the ESAs nor competent authorities ("CAs") possess any formal power to disapply directly applicable EU legal text. Therefore, any changes to the application of the above-mentioned EU rules would formally need to be implemented through EU legislation.

    What's new?

    On 24 November 2017, the ESAs issued a communication concerning VM exchange for physically-settled FX forwards under EMIR (the "Communication").

    The Communication indicates that the Boards of the ESAs are currently undertaking a review of the RTS and develop draft amendments to the RTS that align the treatment of VM for physically-settled FX forwards with the supervisory guidance applicable in other key jurisdictions. Such amendments to the RTS and their subsequent implementation would reiterate ESAs' commitment to apply relevant international standards, and require the exchange of VM for physically-settled FX forwards in a risk-based and proportionate manner.

    In particular, the scope should cover transactions between institutions (i.e. credit institutions and investment firms). In addition, for some institution-to-non-institution transactions, the CAs should consider the actual risk that the exchange of VM would mitigate and whether non-institutions might face additional risks related to the daily exchange of VM.

    The Communication is available here.

    What's next?

    Once the Boards of the ESAs have finalised its current review, and assuming a solution is reached, then the amended RTS should be submitted to the European Commission in December 2017.

    Accordingly, as regards difficulties that in particular certain end-users are facing, the ESAs expect CAs to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner.

  • EMIR - ESAs amend RTS 2016/2251 on variation margin exchange for physically-settled FX forwards

  • Background

    The Commission delegated regulation (EU) 2016/2251 supplementing Regulation (EU) No 648/2012 on OTC derivatives, central counterparties ("CCPs") and trade repositories ("EMIR", available here) with regard to regulatory technical standards for risk-mitigation techniques for OTC derivative contracts not cleared by a CCP entered into force on 4 January 2017 (the "RTS 2016/2251", available here).

    Pursuant to Article 11(2) of EMIR, financial counterparties and non-financial counterparties referred to in Article 10 of EMIR shall mark-to-market on a daily basis the value of outstanding contracts.

    Having regard to Articles 27(a) and 37(2)(b) of the RTS 2016/2251, counterparties shall exchange variation margin ("VM", as defined under Article 1(2) of the RTS 2016/2251) without initial margin (by a way of derogation from Article 2(2) of the RTS 2016/2251), consistent most notably with the BCBS-IOSCO framework, for physically-settled foreign exchange ("FX") contracts by 3 January 2018.

    On 24 November 2017, the ESAs issued a communication concerning VM exchange for physically-settled FX forwards under EMIR (the "Communication", available here). The Communication indicates that the Boards of the ESAs are currently undertaking a review of the RTS 2016/2251 and develop draft amendments to the RTS 2016/2251 that align the treatment of VM for physically-settled FX forwards with the supervisory guidance applicable in other key jurisdictions. Such amendments to the RTS 2016/2251 and their subsequent implementation would reiterate ESAs' commitment to apply relevant international standards, and require the exchange of VM for physically-settled FX forwards in a risk-based and proportionate manner.

    From a legal perspective, neither the ESAs nor competent authorities ("CAs") possess any formal power to disapply directly applicable EU legal text. Therefore, any changes to the application of the above-mentioned EU rules would formally need to be implemented through EU legislation.

    What's new?

    On 19 December 2017, the ESAs published their draft RTS on amending the RTS 2016/2251 with regard to physically-settled FX forwards (JC/2017/79, the "Amending Draft RTS").

    In particular, the Amending Draft RTS would insert the following new Article 31a entitled "Treatment of physically settled foreign exchange forward derivatives" into the RTS 2016/2251:

    "By way of derogation from Article 2(2), counterparties may provide in their risk management procedures that variation margins are not required to be posted or collected for physically settled foreign exchange forward contracts in any of the following cases:

    (a) where one of the counterparties is a counterparty other than an ‘institution’ in the sense of point (3) of Article 4(1) of Regulation (EU) No 575/2013;

    (b) where one of the counterparties is established in a third country and would not meet the definition of ‘institution’ in the sense of that Article, if it were established in the Union".

    The Amending Draft RTS are available here.

    What's next?

    In view of the remaining steps that the Amending Draft RTS need to go through before being finalised and published in the OJEU, the ESAs are aware that the new treatment for physically-settled FX forwards under the amended RTS only start to apply after 3 January 2018. Consequently, the ESAs are of the view that, for institution-to-non-institution transactions, the CAs should apply the EU framework in a risk-based and proportionate manner until the amended RTS enter into force.

  • EMIR - ESMA updates its Q&As

  • Background

    The Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories entered into force on 16 August 2012 ("EMIR", available here).

    The purpose of this document is to promote common supervisory approaches and practices in the application of EMIR. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of EMIR.

    The content of this document is aimed at competent authorities under the Regulation to ensure that in their supervisory activities their actions are converging along the lines of the responses adopted by ESMA. It should also help investors and other market participants by providing clarity on the requirements under EMIR.

    What's new?

    On 14 December 2017, the ESMA updated its Question and Answers ("Q&As") document on EMIR.

    The 4 new questions are the following:

    • Indirect clearing: the ESMA clarifies that a clearing member shall open and maintain in the CCP a segregated account for the exclusive purpose of holding the assets and positions of indirect clients of each client held by the clearing member in an account. A clearing member would have to open a separate account at the CCP for each client’s pool of Indirect Clients who have elected the account.
    • Reporting of collateral: the ESMA specifies that the return of part of the variation margin initially poster should be reported as a decreased variation margin posted, rather than separate variation margin received. Excess collateral should capture only additional collateral that is posted or received separately and independently from the initial and variation margin (any collateral posted or received under the concept of variation margin, should be reported as such, rather than as excess collateral).
    • Reporting to TRs the ESMA clarifies that in case of basis swaps the word "spread" refers to the interest rate added to one of the floating rates. The ESMA also specifies that the direction of the trade should be determined at the beginning of the contract and should remain the same irrespective of the possible changes in the spread value during the life of the contract. When both legs of the swap bear a spread, the counterparty paying the higher spread should be identified as the buyer.
    • Contracts with no maturity date: the ESMA specifies that each transaction has to be reported with a Unique Trade Identifier and action type "New", even if they are executed and then netted or terminated for other reasons during the same day. Transactions have to be reported even if they are concluded with a counterparty that is not subject to the reporting obligation, such as an individual not carrying out an economic activity and who is consequently not considered as undertakings. It is strongly recommended to compress subsequent transactions in a position in order to simplify valuation updates.

    The Q&A Document on EMIR implementation is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • EMIR/MiFIR - 2 RTS on indirect clearing arrangements published in the OJEU

  • Background

    The Regulation (EU) No 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here).

    In order to clear OTC derivatives, a counterparty may become a clearing member, the client of a clearing member or establish indirect clearing arrangements with a clearing member, provided that those arrangements do not increase counterparty risk and ensure that the assets and positions of the counterparty benefit from protection equivalent to that referred to in Articles 39 and 48 of EMIR.

    On 15 March 2013, the Commission delegated regulation (EU) No 149/2013 supplementing EMIR with regard to regulatory technical standards ("RTS") on indirect clearing arrangements, the clearing obligation, the public register, access to a trading venue, non-financial counterparties, and risk mitigation techniques for OTC derivatives contracts not cleared by a CCP entered into force (the "Delegated Regulation 149/2013", available here).

    Pursuant to Article 1(b) of the Delegated Regulation 149/2013, "indirect clearing arrangement" means 'the set of contractual relationships between the CCP, the clearing member, the client of a clearing member and indirect client that allows the client of a clearing member to provide clearing services to an indirect client'.

    Against this background, the Regulation (EU) No 600/2014 on markets in financial instruments entered into force on 2 July 2014 and will apply as from 3 January 2018 ("MiFIR", available here). In accordance with Article 30(1) of MiFIR, indirect clearing arrangements with regard to exchange-traded derivatives ("ETDs") are permissible provided that those arrangements do not increase counterparty risk and ensure that the assets and positions of the counterparty benefit from protection with equivalent effect to that referred to in Articles 39 and 48 of EMIR.

    Based mostly on ESMA draft RTS (available here), the European Commission ("Commission") issued (i) its draft delegated regulation supplementing MiFIR with regard to RTS on indirect clearing arrangements (C(2017) 6268 final, available here) and its draft delegated regulation amending the Delegated Regulation 149/2013 with regard to RTS on indirect clearing arrangements (C(2017) 6270 final, available here) on 22 September 2017. These draft delegated regulations aim to:

    • Simplify and clarify the requirements that relate to the management of the default of a client providing indirect clearing services;
    • Adapt account structures in order to rationalise the offering of indirect clearing services;
    • Allow indirect clearing services to be provided in chains going beyond the client of a direct client provided that appropriate and equivalent protection is ensured throughout the chain;
    • Set out homogeneous requirements for indirect clearing arrangements relating to both OTC derivatives and ETDs.

    It is to be noted that the term "indirect clearing arrangements" has been amended as follows: 'the set of contractual relationships between providers and recipients of indirect clearing services provided by a client, an indirect client or a second indirect client'.

    What's new?

    On 21 November 2017, the two following Commission delegated regulations on indirect clearing arrangements were published in the OJEU:

    • Commission delegated regulation (EU) 2017/2154 supplementing MiFIR with regards to RTS on indirect clearing arrangements (the "Delegated Regulation 2017/2154", available here);
    • Commission delegated regulation (EU) 2017/2155 amending Delegated Regulation 149/2013 with regards to RTS on indirect clearing arrangements (the "Delegated Regulation 2017/2155", available here).

    What's next?

    The Delegated Regulations 2017/2154 and 2017/2155 entered into force on 11 December 2017 and applies as from 3 January 2018.

  • Financial Stability - Commission proposes a Regulation establishing the European Monetary Fund

  • Background

    The global financial crisis starting in 2007 revealed that the EU lacked instruments to swiftly respond to challenges to financial stability in euro area. To address the exceptional situation of a severe deterioration of the borrowing conditions in this area, several measures were adopted.

    On 11 May 2010, the European Council (the "Council") issued a regulation establishing the European Financial Stabilization Mechanism to rapidly provide financial assistance to any EU country experiencing or threatened by severe financial difficulties (the "EFSM Regulation", available here). In June 2010, the euro area countries created the European Financial Stability Facility as temporary crisis resolution mechanism (the "EFSF"). It provided financial assistance to Ireland, Portugal and Greece. The assistance was financed via bonds and other debt instruments on capital markets.

    On 17 December 2010, the Council agreed on the need for the EU Member States whose currency is the euro to establish a permanent stability mechanism (the "Council Conclusions", available here). On 2 February 2012, the euro area countries established the European Stability Mechanism (the "ESM") to safeguard the financial stability to the euro area as a whole (the "ESM Treaty", available here). The ESM Treaty stipulated that the ESM as a permanent intergovernmental institution will replace the EFSF and the EFSM.

    The ESM was created outside the framework of the EU, however, Article 352 of the Treaty on the Functioning of the European Union (the "TFEU") allows for the integration of the ESM into the EU framework, as this action is necessary for the financial stability of the euro area.

    On 15 July 2014, the European Parliament issued a regulation (EU) No 806/2014 establishing uniform rules and a procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism (the "SRM") and a Single Resolution Fund (the "SRF") (the "SRM Regulation", available here). It applies since 1 January 2016. The SRF is composed of contributions from credit institutions and investment firms in the 19 participating EU Member States and ensures that the financial industry, as a whole, finances the stabilization of the financial system.

    What's new?

    On 6 December 2017, the European Commission (the "Commission") published a proposal for a Council Regulation under Article 352 TFEU on the establishment of the European Monetary Fund (the "EMF") which would replace the ESM (COM(2017) 827 final, the "EMF Regulation"). The EMF Regulation's annex (the "Annex") comprises the Statute of the EMF largely mirroring the text of the ESM Treaty.

    According to the EMF Regulation, the EMF shall succeed the ESM assuming all its rights and obligations. The EMF shall continue to provide financial stability support to Member States in need, to raise funds by issuing capital market instruments, and to engage in money market transactions. It shall be done with increased efficiency, transparency and democratic accountability. The EMF shall be accountable to the European Parliament, the Council and national parliaments of participating countries.

    All EU Member States of the euro area and which are currently contracting parties to the ESM Treaty shall be members of the EMF at the moment of the entry into force of EMF Regulation. The EMF shall not create new financial obligations for these States as regards their contribution to the authorised capital stock of the EMF, to which they have already subscribed. The participation of additional Member States shall remain possible, once they adopt the euro.

    The EMF Regulation departs from the measures of the ESM Treaty for reasons as legal consistency with EU legal framework and limited changes with a view to enhance the operations and decision making:

    • The EMF will be able to provide the backstop (credit line or guarantee) for the SRF, by acting as a last resort lender and ultimately protecting taxpayers in the unlikely event that the SRF does not have the resources to facilitate the orderly resolution of a distressed bank;
    • As regards the management of financial assistance programmes, the EMF Regulation foresees a more direct involvement of the EMF, alongside the Commission;
    • In terms of governance, the EMF Regulation includes the possibility for faster decision-making in specific urgent situations;
    • The EMF Regulation refers to the possibility for the EMF to develop new financial instruments, which could be particularly useful in support of a possible stabilisation function in the future.

    The EMF Regulation is available here.

    The Annex is available here.

    What's next?

    The Board of Governors, as the highest decision-making body of the ESM representing the contracting parties to the ESM Treaty, should give its prior consent to the succession to the EMF and transfer of the subscribed capital. The succession should be completed upon the entry into force of the EMF Regulation and the consent of the ESM, whichever is the latest.

    The European Parliament, which has to give its consent, and the Council are invited to adopt the EMF Regulation by mid-2019.

    The final EMF Regulation enters into force on the day of its publication in the OJEU.

  • MAR - ESMA updates its Q&As

  • Background

    The Market Abuse Regulation came into effect on 3 July 2016 ("MAR", available here). It aims at increasing market integrity and investor protection, enhancing the attractiveness of securities markets for capital raising.
    ESMA is required to play an active role in building a common supervisory culture by promoting common supervisory approaches and practices. It does this by providing responses to questions raised by the general public and competent authorities in relation to the practical application of MAR.

    What's new?

    On 14 November and 21 November 2017, ESMA published successively updated version of its Q&As document on MAR. 

    ESMA has first added a new question refering to the time span for the calculation of the CO2 equivalence emissions and the rated thermal input.

    The ESMA clarifies that the year of reference for the calculations should be 2016 to determine whether a participant is an emission allowance market participant between 3 January and 30 April 2018, and 2017 to determine whether a participant is an emission allowance market participant from 1 May 2018 onwards, until the next calculations become applicable on 1 May 2019. 

    ESMA has then after added two new questions/answers which refer to managers’ transactions. 

    ESMA clarifies that the insider dealing prohibition applies during closed periods in the same way as it does at any other time and should be complied with by persons discharging managerial responsibilities ("PDMR"). Moreover, types of transactions by PDMRs prohibited during a closed period are the same as those types of transaction subject to the notification requirements. 

    The ESMA Q&As document on MAR is available here.

    What's next?

    This Q&As document on MAR is intended to be continually edited and updated as and when new questions are received.

  • MiFID I - ESMA publishes MiFID compliance function peer review results

  • Background

    The ESMA Supervisory Convergence Work Programme 2016 included a peer review on the Guidelines to assess compliance by the NCAs, identify good practices and potential areas for improvement.

    The work involved assessing the approaches of thirty-one EEA NCAs to supervising investment firms’ compliance functions against the Guidelines on certain aspects of the compliance function under MiFID requirements, and covered the period from 1 July 2014 to 30 June 2016. The assessment also involved on-site visits of the NCAs from Austria, Cyprus, Denmark, France and Slovakia.

    What's new?

    On 29 November 2017, the ESMA published the results of its Peer Review on the Guidelines on certain aspects of the compliance function under MiFID.

    The ESMA found diversity in the supervisory approaches applied by NCAs, showing a different reliance on the compliance function as a key source of information on the firms’ compliance with MiFID requirements. For many authorities the compliance function was generally not the main target in supervisory reviews but an ancillary target of supervision of firms’ obligations under MiFID.

    Good practices identified during the peer review will help in enhancing supervisory convergence across EEA NCAs. Key good practices identified included:

    • The pre-screening by NCAs of compliance officers;
    • Clear communications by NCAs of expectations to the compliance function at the authorisation stage; and
    • NCAs undertaking on-site visits shortly after the firm’s authorisation, in particular for riskier firms.

    The Review positively assessed 27 NCAs regarding the supervision of how the compliance function performs risk assessments, monitors compliance obligations and provides reports to senior management, while 22 NCAs were positively assessed on their supervision of the compliance function’s advisory role, which includes support for staff training, day-to-day assistance for staff and participating in the establishment of new policies and procedures within the investment firm.

    The report provides a detailed assessment of the effective application of the Guidelines and the capacity of the NCAs to respond to market developments. It also assesses the capacity of NCAs to achieve high quality supervisory outcomes, including the adequacy of resources.

    The ESMA’s report on MiFID compliance function peer review is available here.

  • MiFID II - ESMA Opinion on position limits on ICE Brent Crude contracts

  • Background

    On 20 October 2017, the ESMA received a notification from the FCA under Article 57(5) of MiFID II (available here) regarding the exact position limits the FCA intends to set for the ICE Brent Crude commodity futures and options contracts in accordance with the methodology for calculation established in Commission Delegated Regulation (EU) 2017/591 (available here) supplementing MiFID II with regard to regulatory technical standards for the application of position limits in commodity derivatives ("RTS 21") and taking into account the factors referred to in Article 57(3) of MiFID II.

    The ESMA’s competence to deliver an opinion is based on Article 57(5) of MiFID II.

    What's new?

    On 7 December 2017, the ESMA published its Opinion on position limits on ICE Brent Crude contracts (the "Opinion").

    The ESMA’s opinion is that this spot month position limit does comply with the methodology established in RTS 21 and is consistent with the objectives of Article 57 of MiFID II. The other months’ position limit does comply with the methodology established in RTS 21 and is consistent with the objectives of Article 57 of MiFID II.

    The Opinion is available here.

  • MiFID II - ESMA Opinion on position limits issues for third-country trading venues

  • Background

    The MiFID II (available here) requires competent authorities to set limits on the position that a person can hold at any time in a contract in commodity derivatives traded on a trading venue. Those position limits include also economically equivalent OTC contracts. Based on Article 57(12) of MiFID II, Article 6 of Commission Delegated Regulation (EU) 2017/591 ("RTS 21", (available here) determines the criteria that have to be met in order for an OTC contract to be considered economically equivalent to a commodity derivative traded on a trading venue.

    However, Article 57 of MiFID II does not provide any indication as to whether a contract in commodity derivatives traded on a third-country venue should be considered as traded OTC, and thereby whether such a contract could qualify as an economically equivalent OTC contract in accordance with Article 6 of RTS 21. The clarification of this issue is relevant in order to assess whether those contracts should be counted towards the EU position limit regime.

    The ESMA is concerned that the lack of clarity regarding the treatment of the contracts in commodity derivatives traded on third-country venues is likely to result in different supervisory approaches across Competent Authorities ("CAs") in the application of position limits provisions under MiFID II and may undermine the establishment of a level playing field. The ESMA therefore considers it necessary to provide guidance on the matter to prevent the development of inconsistent supervisory practices across CAs and, thereby, contribute to supervisory convergence and strengthen the legal certainty required in the application of MiFID II.

    What's new?

    On 15 December 2017, the ESMA published its Opinion on determining third-country trading venues for the purpose of position limits under MiFID II (the "Opinion").

    The Opinion sets out that position limits should apply only to contracts in commodity derivatives traded on EU trading venues and to OTC contracts that are equivalent.

    The ESMA sets out 3 conditions which should be met for a third country trading facility to be considered a trading venue under MiFID II position limit regime:

    • Multilateral system operator;
    • Subject to authorisation of the third country; and
    • Subject to supervision and enforcement by the third-country that is a full signatory of IOSCO Multilateral Memorandum of Understanding.

    The Opinion is available here.

    What's next?

    The ESMA will carry out the determination of third-country trading venues and publish the results in the course of 2018.

  • MiFID II - ESMA publishes its Q&As on interim transparency calculations

  • Background

    MiFID II/MiFIR requires performing various transparency calculations in relation to trading of equity and all non-equity instruments. Those calculations will have to be performed both for the transition from MiFID I to MiFID II/MiFIR, as well as on an ongoing basis once MiFID II/MiFIR applies. National Competent Authorities ("NCAs") are responsible for performing the transparency calculations under MiFID II/MiFIR, both for transitional purposes as well as the ongoing calculations.

    ESMA was requested to coordinate the exercise in the transitional phase for the delegating NCAs. ESMA staff performed the transitional transparency calculations using data related to 2016 trading activity provided by trading venues.

    This document aims at gathering frequently asked questions and answers ("Q&As") regarding the publication of the MiFID II Transitional Transparency Calculations ("TTC") for all non-equity instruments in accordance with Commission Delegated Regulation 2017/583 on transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives under MiFIR (available here).

    What's new?

    On 6 December 2017, the ESMA updated its Q&As document on interim transparency calculations under MiFID II.

    The updated Q&As document addresses 6 new questions on the application of the TTC:

    • The new transparency requirements determined by the TTC will be applicable starting on 3 January 2018;
    • The outcomes of the TTC are applied from 3 January 2018 until 31 May 2019 for derivatives (including CFDs), securitised derivatives, ETCs and ETNs, SFPs and emission allowances, LIS and SSTI thresholds for bonds. The outcomes of the TTC are applied from 3 January 2018 until 15 May 2018 for bonds - with respect to the liquidity assessment. The outcomes of the TTC are applied from 3 January 2018 until 31 March 2019 for equity instruments;
    • From 3 January 2018, the Financial Instruments Transparency System ("FITRS") will start publishing non-equity transitional transparency calculations for non-equity instruments on an ISIN basis for the instruments it receives.
    • From 3 January 2018, FITRS will start publishing non-equity transitional transparency calculations with respect to LIS and SSTI thresholds for bonds (except ETCs and ETNs) on per ISIN basis for the instruments it receives.
    • From 3 January 2018, FITRS will start publishing liquidity assessment flag for bonds (except ETCs and ETNs) on per ISIN basis for the instruments it receives and which are admitted to trading or first traded on a trading venue from 3 January 2018 onwards. The TTC published in the ESMA website provide the necessary information on the liquidity assessment for bonds admitted to trading or first traded on a trading venue before 3 January 2018.
    • From 3 January 2018, FITRS will perform transparency calculations for the new equity instruments it receives and having a date of first trade later than or equal to 3 January 2018. For equity instruments traded for the first time on a trading venue before 3 January the TTC published in the ESMA website will provide the TTC.

    The ESMA Q&A on interim transparency calculations is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • MiFID II/MiFIR - 3 Commission equivalence decisions for Australia, Hong-Kong, USA published in the OJEU

  • Background

    The Directive 2014/65/EU ("MiFID II", available here) and the Regulation (EU) No 600/2014 on markets in financial instruments entered into force on 2 July 2014 and will apply as from 3 January 2018 ("MiFIR", available here).

    In accordance with Article 23(1) of MiFIR, an investment firm shall ensure the trades it undertakes in shares admitted to trading on a regulated market or traded on a trading venue shall take place on a regulated market, multilateral trading facility ("MTF") or systematic internaliser, or a third-country trading venue ("TV") assessed as equivalent in accordance with Article 25(4)(a) of MiFID II, as appropriate.

    Against this background, the European Commission (the "Commission") should assess whether the legal and supervisory framework of a third country ensures that a TV authorised in that third country complies with legally binding requirements which are equivalent to the requirements resulting from the MiFID II/MiFIR framework. In particular, a third-country legal and supervisory framework may be considered equivalent where that framework fulfils at least 4 conditions:

    • The markets are subject to authorisation and to effective supervision and enforcement on an ongoing basis;
    • The markets have clear and transparent rules regarding the admission of securities to trading so that such securities are capable of being traded in a fair, orderly and efficient manner, and are freely negotiable;
    • Security issuers should be subject to periodic and ongoing information requirements ensuring a high level of investor protection; and
    • Market transparency and integrity should be ensured by the prevention of market abuse in the form of insider dealing and market manipulation.

    What's new?

    On 13 December 2017, the following 3 Commission implementing decisions were published in the OJEU (collectively the "Decisions"):

    • The Commission implementing decision (EU) 2017/2318 of 13 December 2017 on the equivalence of the legal and supervisory framework in Australia applicable to financial markets in accordance with MiFID II (the "Decision 2017/2318", available here). The annex to the Decision 2017/2318 refers to "ASX Limited" and "Chi-X Australia Pty Ltd" as equivalent financial markets in Australia;
    • The Commission implementing decision (EU) 2017/2319 of 13 December 2017 on the equivalence of the legal and supervisory framework applicable to recognised exchange companies in Hong Kong Special Administrative Region in accordance with MiFID II (the "Decision 2017/2319", available here). The annex to the Decision 2017/2319 refers to the "Stock Exchange of Hong Kong Limited (SEHK)" as recognised exchange companies in Hong Kong; and
    • The Commission implementing decision (EU) 2017/2320 of 13 December 2017 on the equivalence of the legal and supervisory framework of the United States of America for national securities exchanges and alternative trading systems in accordance with MiFID II (the Decision 2017/2320", available here). The annex to the Decision 2017/2320 refers to 21 national securities exchanges and to 33 alternative trading systems registered with the US Securities and Exchange Commission ("SEC") and considered equivalent to regulated markets as defined in MiFID II.

    What's next?

    The Decisions entered into force on 14 December 2017.

    The Decisions will be complemented by cooperation arrangements to ensure the effective exchange of information and coordination of supervisory activities between the national competent authorities and respectively the Australian Securities and Investments Commission ("ASIC"), the Hong Kong Securities and Futures Commission ("SFC"), and the SEC.

    The Commission will continue monitoring on a regular basis the evolution of the legal and supervisory arrangements for regulated markets, the effectiveness of supervisory cooperation in relation to monitoring and enforcement and the fulfilment of the conditions on the basis of which the Decisions have been taken.

  • MiFID II/MiFIR - Amending Commission delegated regulation on the definition of SIs published in the OJEU

  • Background

    The Directive 2014/65/EU MiFID II", available here) and the Regulation (EU) No 600/2014 on markets in financial instruments ("MiFIR", available here) entered into force on 2 July 2014 and shall apply as from 3 January 2018.

    Pursuant to Article 4(1)(20) of MiFID II, systematic internaliser ("SI") means "an investment firm which, on an organised, frequent systematic and substantial basis, deals on own account when executing client orders outside a regulated market, an MTF or an OTF without operating a multilateral system".

    On 31 March 2017, 28 MiFID II/MiFIR RTS and a delegated directive were published in the OJEU, including the Commission delegated regulation 2017/565 supplementing MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of MiFID II (the "Delegated Regulation 2017/565", available here). Articles 12-17 of the Delegated Regulation 2017/565 further specifies the definition of SIs.

    In light of alleged nascent industry initiatives building on the ambiguity around the notion of "trading on own account when executing client orders", the European Commission (the "Commission") considered necessary to further specify the definition of SIs to address those technological market developments and circumscribe the risk of circumvention of MiFID II.

    On 28 August 2017, the Commission issued its delegated regulation amending the Delegated Regulation 2017/565 as regards the specification of the definition of SIs for the purposes of MiFID II (C(2017) 5812 final – the "Amending Delegated Regulation", available here). The Amending Delegated Regulation introduces a new Article 16a into the Delegated Regulation 2017/565 (entitled "Participation in matching arrangements"), which specifies that "an investment firm shall not be considered to be dealing on own account for the purposes of Article 4(1)(20) of MiFID II where that investment firm participates in matching arrangements entered into with entities outside its own group with the objective or consequence of carrying out de facto riskless back-to-back transactions in a financial instrument outside a trading venue".

    What's new?

    On 13 December 2017, the Amending Delegated Regulation was published in the OJEU (the "Delegated Regulation 2017/2294").

    The Delegated Regulation 2017/2294 is available here.

    What's next?

    The Delegated Regulation 2017/2294 entered into force on 14 December 2017 and applies as from 3 January 2018.

  • MiFID II/MiFIR - ESMA updates its Q&As on commodity derivatives topics

  • Background

    The MiFID II (available here) encompasses the rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR (available here), together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Question and Answers ("Q&As") document is to promote common supervisory approaches and practices in the application of MiFID II on commodity derivatives topics.

    What's new?

    On 15 December 2017, the ESMA updated its Q&As document on commodity derivatives issues regarding the implementation of MiFID II and MiFIR.

    The 4 new questions refer to position limits and position reporting.

    On position limits the ESMA clarifies that the determination of the spot month for the application of the spot month position limit should be made by the NCA on the basis of the contract specification and the characteristics of the market for that particular commodity derivative. Where there are daily or weekly as well as monthly contracts, the positions to be included in the spot month period and subject to the position limit, include positions in contracts referencing days or weeks which fall entirely inside that spot month.

    On position reporting the ESMA specifies that:

    • Where there is a chain of investment firms that are executing trades on behalf of their clients, each one of them has an obligation to report a complete breakdown of the positions held by all persons down the chain, down to the end client, as defined under Article 58(3) of MIFID II.
    • The obligation to report positions under Article 58 of MIFID rests with members or participants of regulated markets, MTFs and clients of OTFs or with investment firms when executing EEOTC (Economically Equivalent OTC contracts) transactions on behalf of their clients.
    • The Position Quantity held in a contract must be reported in the same unit as used by the Competent Authority to set the position limit for that contract. The position limits for those contracts that refer to the same underlying commodity but have a variety of delivery periods, e.g. annual (calendar), quarterly, monthly, weekly (whole week, working day week and weekend) or daily are set in units of underlying since a lot does not represent a standard quantity of underlying across all maturities/delivery periods. Thus, for these contracts, the figures reported in the field position quantity must be expressed in units of underlying.

    The ESMA Q&A on commodity derivatives topics under MiFID II/MiFIR is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • MiFID II/MiFIR - Commission equivalence decision on US DCMs and SEFs published in the OJEU

  • Background

    The Directive 2014/65/EU ("MiFID II", available here) and the Regulation (EU) No 600/2014 on markets in financial instruments entered into force on 2 July 2014 and will apply as from 3 January 2018 ("MiFIR", available here).

    In accordance with Article 28(4) of MiFIR, the European Commission (the "Commission") may adopt decisions determining that the legal and supervisory framework of a third country ensures that a trading venue ("TV") authorised in that third country complies with legally binding requirements which are equivalent to EU requirements, and which are subject to effective supervision and enforcement in that third country. This procedure for recognition of TVs established in third countries aims to allow financial and certain non-financial counterparties established in the EU to conclude transactions in derivatives subject to the trading obligation on third-country TVs recognized as equivalent.

    In the context of the equivalence assessment of swap trading platforms operating in the United States of America ("USA"), the Commission verified that the legal and supervisory arrangements under the US Commodity Exchange Act ("CEA") and implementing regulations ensure that designated contract markets ("DCMs") and swap execution facilities ("SEFs") established in the USA and authorised by the Commodity Futures Trading Commission ("CFTC)" are subject to legally binding requirements, which are equivalent to the requirements for the TVs resulting from the MiFID II/MiFIR framework. The Commission also verified whether DCMs and SEFs are subject to effective supervision and enforcement in the USA.

    What's new?

    On 6 December 2017, the Commission implementing decision on the equivalence of the legal and supervisory framework applicable to DCMs and SEFs in the USA in accordance with MiFIR was published in the OJEU (the "Decision 2017/2238").

    In the annex to the Decision 2017/2238, 14 DCMs and 23 SEFs are considered equivalent to TVs as defined in MiFID II.

    The Decision 2017/2238 is available here.

    What's next?

    The Decision 2017/2238 entered into force on 7 December 2017.

    The Commission will monitor on a regular basis the evolution of the legal and supervisory arrangements for DCMs and SEFs, US market developments, the effectiveness of supervisory cooperation in relation to monitoring and enforcement and the fulfilment of the conditions on the basis of which the Decision 2017/2238 has been taken.

  • MiFID II/MiFIR - Commission implementing regulation 2017/2382 on the transmission of information published in the OJEU

  • Background

    The Directive 2014/65/EU MiFID II", available here) and the Regulation (EU) No 600/2014 on markets in financial instruments ("MiFIR", available here) entered into force on 2 July 2014 and shall apply as from 3 January 2018.

    On 29 June 2016, the ESMA issued and submitted to the European Commission (the "Commission") its first set of technical standards under the MiFID II/MiFIR framework, which included its draft implementing technical standards under the mandates of Articles 34(9) and 35(12) of MiFID II (the "Draft ITS", available here).

    What's new?

    On 20 December 2017, based on the Draft ITS, the Commission implementing regulation (EU) 2017/2382 of 14 December 2017 laying down ITS with regard to standard forms, templates and procedures for the transmission of information in accordance with MiFID II was published in the OJEU (the "Implementing Regulation 2017/2382").

    The Implementing Regulation 2017/2382 shall apply to (i) investment firms and market operators operating a multilateral trading facility ("MTF") or an organised trading facility ("OTF"), and (ii) credit institutions authorised under the Directive 2013/36/EU, which provide one or more investment services or perform investment activities under MiFID II, and wish to use tied agents under the right of freedom to provide investments services or by establishing of a branch.

    It is to be noted that the Implementing Regulation 2017/2382 contains the following finalised 13 annexes:

    • Annex I – Form for the investment services and activities passport notification and the change of investment services and activities particulars notification;
    • Annex II – Form for the communication regarding an investment services and activities passport notification by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex III – Form for the communication of a change in the particulars of an investment services and activities passport notification or in a notification for the provision of arrangements to facilitate access to an MTF or OTF by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex IV – Form for the notification for the provision of arrangements to facilitate access to an MTF or OTF;
    • Annex V – Form for the communication regarding a notification for the provision of arrangements to facilitate access to an MTF or OTF by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex VI – Form for the branch passport notification and change of branch particulars notification;
    • Annex VII – Form for the tied agent passport notification and change of tied agent particulars notification;
    • Annex VIII – Form for the communication regarding a branch passport notification by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex IX – Form for the communication regarding a tied agent passport notification by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex X – Form for a change in the tied agent particulars notification concerning the termination of the operation of a branch or the cessation of the use of a tied agent established in another Member State;
    • Annex XI – Form for the communication on a change of branch particulars notification by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex XII – Form for the communication on a change of tied agent particulars notification by the competent authority of the home Member State to the competent authority of the host Member State;
    • Annex XIII – Form for the communication by the competent authority of the home Member State to the competent authority of the host Member State on the termination of a branch or of the cessation of the use of a tied agent established in Member State outside its home Member State.

    The Implementing Regulation 2017/2382 is available here.

    What's next?

    The Implementing Regulation 2017/2382 entered into force on 21 December 2017 and applies as from 3 January 2018.

  • MiFID II/MiFIR - ESMA updates its Q&As on data reporting topics

  • Background

    The MiFID II (available here) and MiFIR (available here) encompass rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Question and Answers ("Q&As") document is to promote common supervisory approaches and practices in the application of MiFIR on data reporting issues.

    What's new?

    On 18 December 2017, the ESMA updated its Q&As document on data reporting issues regarding the implementation of MiFID II and MiFIR.

    3 new questions are included:

    • Date and time of the request of admission and admission: the ESMA clarifies that if Field 11 (Date of admission to trading or date of first trade) is not known at the time of submission of reference data for FIRDS it should be reported with the default value of 9999-12-31T00:00:00, unless the financial instrument has a maturity/termination date, in which case that date should be used. As soon as date of admission to trading or date of first trade is known the FIRDS reference data should be amended with the actual date.
    • Transaction reporting: the ESMA specifies, inter alia, the following points:
      • Where there is more than one level of underlying instrument the underlying is the direct or immediate underlying for the instrument rather than any ultimate underlying.
      • The concept of an underlying for the purposes of Article 26(2)(b) or (c) of MiFIR does not extend to investments in a collective investment undertaking or an exchange traded fund.
      • Transactions in a unit of a collective investment undertaking or an exchange traded fund are only reportable if the unit of a collective investment undertaking or the exchange traded fund is itself admitted to trading or traded on a trading venue or a request for admission has been made.
      • The concept of underlying extends to the instruments on which ADRs, GDRs are based for the purposes of Article 26(2)(b) of MIFIR.
      • Transactions executed through non-EU branches of EU investment firms are subject to transaction reporting under Article 26 of MiFIR since a branch has no legal personality and is part of the investment firm according to Article 4(1)(30) of MIFID II. This requirement applies to transactions executed in financial instruments specified in Article 26(2) of MiFIR.

    The ESMA Q&A on data reporting topics under MiFID II and MiFIR is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • MiFID II/MiFIR - ESMA updates its Q&As on investor protection topics

  • Background

    The MiFID II (available here) and MiFIR (available here) encompass rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Question and Answers ("Q&As") document is to promote common supervisory approaches and practices in the application of MiFIR on investor protection issues.

    What's new?

    On 18 December 2017, the ESMA updated its Q&As document on investor protection issues regarding the implementation of MiFID II and MiFIR.

    The 10 new questions are the following:

    • Suitability and appropriateness: the ESMA clarifies that when providing portfolio management to retail clients, investment firms should comply with their obligations under MiFID II by providing the information on how the investment meets the client’s preferences, objectives and other characteristics.
    • Inducement: the ESMA stresses that it is important to determine if the payments received by the investment firm for the provision of investment/portfolio management function on behalf of the funds can also be said to be paid in relation to, or in connection with, the provision of investment services to the firm’s other clients. The ESMA considers this determination in light of all the inducement determinations.
    • Provision of investment services and activities by third country firms: the ESMA clarifies that, as MiFID II states that where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client, such a solicitation, promotion or advertising should be considered regardless of the person through whom it is issued: the third country firm itself, an entity acting on its behalf or having close links with such third country firm or any other person acting on behalf of such firm.
    • Application of MiFID II after 3 January 2018: the ESMA clarifies the following points:
      • Authorisation granted under MiFID I should continue to be valid past 3rd January 2018 but notes that in this case, the licence holders may be subject to review by the competent authorities regarding fulfilling the conditions for initial authorisation. Moreover, passport notifications made before the entry into application of MiFID II should still be valid after 3 January 2018.
      • Firms established in Member States that have not transposed MiFID II by 3 January 2018 but have been already authorised under MiFID I and have already made a valid passport notification, may continue to provide investment services in the Member States for which they have already made a valid passport notification under certain conditions.
      • The competent authorities in a host Member State should not be obliged to accept new passport notifications concerning firms authorised in a Member State that has not transposed MiFID II at the date of 3 January 2018.
      • If a host Member State has not transposed MiFID II by 3 January 2018, it cannot refuse to accept notifications from the home competent authority of an incoming firm nor can it prevent the firm from carrying on business in the territory of that Member State in accordance with its passporting rights either remotely or through a branch.

    ESMA Q&A on investor protection topics under MiFID II and MiFIR is available here.

    What's next?

    The ESMA will periodically review this Q&As and update it where required.

  • MiFID II/MiFIR - ESMA updates its Q&As on market structure topics

  • Background

    The MiFID II (available here) and MiFIR (available here) encompass rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Question and Answers ("Q&As") document is to promote common supervisory approaches and practices in the application of MiFIR on market structure issues.

    What's new?

    On 18 December 2017, the ESMA updated its Q&As document on market structure issues regarding the implementation of MiFID II and MiFIR.

    The three new questions refer respectively to the tick size regime and the application of MiFID II after 3 January 2018, including issues of late transposition.

    • Tick size regime: the ESMA deleted the provision where it says that the tick size regime applies to orders and not the execution price of transaction and that therefore it is possible for a transaction to take place at a price between 2 ticks.
    • Application of MiFID II after 3 January 2018: the ESMA (i) specifies that authorisation granted under MiFID1 should be valid from 3rd January 2018(i) explains that Regulated markets established in Member States that have not transposed MiFID II by 3rd January 2018 but that have already been authorised under MiFID I and have already provided appropriate arrangements that facilitate access to and trading on those markets by remote members and participants in other Member States, may continue to provide these arrangements in those Member States and (iii) confirms that authorised entities in Member States that have transposed the relevant provisions of MiFID II can provide data reporting services throughout the Union.

    The ESMA Q&A on market structure topics under MiFID II and MiFIR is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • MiFID II/MiFIR - ESMA updates its Q&As on post trading topics

  • Background

    The MiFID II (available here) encompasses the rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR (available here), together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Question and Answers ("Q&As") document is to promote common supervisory approaches and practices in the application of MiFID II on post trading topics.

    What's new?

    On 14 December 2017, the ESMA updated its Q&As document on post-trading issues regarding the implementation of MiFID II and MiFIR.

    The new question refers to indirect clearing.

    The ESMA clarifies that a clearing member shall open and maintain in the CCP a segregated account for the exclusive purpose of holding the assets and positions of indirect clients of each client held by the clearing member in an account. A clearing member would have to open a separate account at the CCP for each client’s pool of Indirect Clients who have elected the account.

    The ESMA Q&A on post-trading topics under MiFID II and MiFIR is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • MiFID II/MiFIR - ESMA updates its Q&As on transparency topics

  • Background

    The MiFID II (available here) and MiFIR (available here) encompass rules on governance, products, investor protection and information disclosure.

    MiFID II and MiFIR, together with the Commission delegated acts as well as regulatory and implementing technical standards, will be applicable from 3 January 2018.

    The purpose of the Question and Answers ("Q&As") document is to promote common supervisory approaches and practices in the application of MiFIR on transparency issues.

    What's new?

    On 18 December 2017, the ESMA updated its Q&As document on transparency issues regarding the implementation of MiFID II and MiFIR.

    This update includes 6 new questions:

    • Equity and non-equity transparency: the ESMA clarifies what parameters are to be used in case the transparency calculations are not published by the ESMA or the relevant NCA. Similar explanation goes for the lack of liquidity assessment based on trading activity whether there is or isn’t information on issuance size in reference data.
    • Pre-trade transparency waivers: the ESMA clarifies that the subscription rights should be treated as an extension of the share and be treated as equity instruments. The ESMA also specifies situations where the obligation to disclose quotes to the clients can be waived. The ESMA finally clarifies that the concept of financial instrument in MiFID II / MiFIR is independent of the currency that it is traded in. Therefore, instruments should not be considered as different financial instruments, just because they are traded on multiple venues and/or in multiple currencies.

    The ESMA Q&A on transparency topics under MiFID II and MiFIR is available here.

    What's next?

    The ESMA will periodically review this Q&As document and update it where required.

  • MiFID II/MiFIR - ESMA publishes key transparency calculations

  • Background

    The MiFID II/MiFIR framework introduces transparency requirements for bonds, structured finance products, emission allowances and derivatives, empowering competent authorities to waive the obligation for market operators and investment firms operating a trading venue, to make public pre-trade information for non-equity instruments.

    The Commission Delegated Regulation 2017/583 (available here) on transparency requirements for non-equity instruments establishes that, 6 months prior to the date of application of MiFIR, competent authorities shall publish information on the liquidity classification of financial instruments and the sizes large in scale compared to normal market size and the size specific to the instrument.

    Competent authorities have delegated to ESMA the computation of transparency calculations including the transitional transparency calculations ("TTC"). To execute them, the ESMA has compiled the information from Trading Venues of the Member States. The ESMA had already provided TTC for non-equity instruments in July and September 2017.

    What's new?

    On 6 December 2017, the ESMA published the MiFID II/MiFIR TTC for equity and bond instruments.

    For equity instruments, the TTC have been calculated on the basis of the collection, review and compilation of data provided by 133 trading venues located in the EEA. As a result, 1,907 equity instruments, out of 28,971, have been found to have a liquid market. The ESMA has used the submitted data to provide the trading activity indicators required for the calculation of tick sizes for shares and depository receipts by trading venues and NCAs.

    For bonds, except Exchange Traded Commodities and Exchange Traded Notes, ESMA published the liquidity assessment for individual instruments. The calculations were performed by the ESMA, using data provided by 116 trading venues and the transitional calculations have also incorporated information on OTC markets using information from TRAX. As a result, 566 bond instruments, out of 61,761, have been found to have a liquid market according to the MiFIR criteria.

    The TTC includes equity instruments available for trading in September 2017 and bonds available for trading in October 2017. The TTC for instruments listed after these dates will be performed by NCAs and the ESMA will publish that information in January 2018.

    The ESMA TTC for equity and bond instruments are available here.

    What's next?

    The TTC is applicable since 3 January 2018 and the equity instruments TTC will apply until 31 March 2019 and for bond instruments (liquidity assessment) until 15 May 2018.

  • MiFID II/MiFIR and MAR - ESMA’s briefing note on data systems

  • Background

    The ESMA with the application of both the Markets in Financial Instruments Directive ("MiFID II") and Regulation ("MiFIR") as well as the Market Abuse Regulation ("MAR") on 3 January 2018, will operate four major data systems related to the implementation of MiFID II and MAR respectively.

    The systems will provide market participants and national authorities with data required under MiFID II and MAR related to data reporting and transparency requirements. These include:

    • Financial Instruments Reference Data System ("FIRDS");
    • Transaction Reporting Exchange Mechanism ("TREM");
    • Transparency Calculations System ("FITRS"); and
    • Double Volume Cap Mechanism System ("DVCAP").

    What's new?

    On 6 December 2017, the ESMA published a briefing note on data systems related to the implementation of MiFID II and MAR.

    FIRDS implements MAR/MiFIR provisions which require trading venues and systematic internalisers to report financial reference data. FIRDS will collect and provide reference data of financial instruments traded in Europe. Every day, trading venues and systemic internalisers must provide reference data to the NCAs or, in case of delegation, directly to the ESMA.

    TREM, already run by the ESMA under the previous regulation, will facilitate the exchange of transaction reports executed in financial instruments between NCAs pursuant to Article 26(1) of MiFIR. In particular, TREM permits to ensure the NCA of the most relevant market in terms of liquidity for a given financial instrument receives the information about the transaction.

    FITRS will support the MiFIR transparency regime by publishing the applicable transparency calculations for each instrument subject to transparency requirements. The ESMA will receive, either directly from trading venues, Approved Publication Arrangements (APAs) and Consolidated Tape Providers or from NCAs, reference data and/or quantitative data for both equity and non-equity instruments.

    DVCAP will implement the double volume cap mechanism, to ensure that the use of waivers for pre-trade transparency does not harm price formation. MiFIR introduces a mechanism that caps the amount of trading, in terms of volume, executed under two types of waivers provided for in MiFIR.

    The ESMA briefing note is available here.

  • MiFIR - Commission Delegated Regulation on package orders published in the OJEU

  • Background

    The Regulation (EU) No 600/2014 of 15 May 2014 on markets in financial instruments entered into force on 2 July 2014 and will apply as from 3 January 2018 ("MiFIR", available here). MiFIR introduces pre-trade and post-trade transparency requirements in respect of bonds, structured finance products, emission allowances and derivatives, subject to certain conditions and to certain waivers.

    According to Article 2-1. (48) of MiFIR, "package order" means an order priced as a single unit for the purpose of executing an exchange for physical, or in two or more financial instruments for the purpose of executing a package transaction.

    The Article 9(1)(e) of MiFIR provides for a pre-trade transparency waiver specific to package orders that meet one of the following conditions:

    • At least one of its components is a financial instrument for which there is not a liquid market, unless there is a liquid market for the package order as a whole;
    • At least one of its components is large in scale compared with the normal market size, unless there is a liquid market for the package order as a whole;
    • All of its components are executed on a request-for-quote or voice system and are above the size specific to the instrument.

    On 14 August 2017, based on the ESMA draft RTS (available here), the European Commission published its delegated regulation supplementing MiFIR with regard to package orders (C(2017) 5611 final – the "Draft Regulation", available here). The Draft Regulation establishes (i) the general methodology for determining those package orders for which there is a liquid market in the EU as a whole, and (ii) details asset-class specific criteria for package orders consisting exclusively of interest rate derivatives, equity derivatives, credit derivatives and commodity derivatives.

    What's new?

    On 28 November 2017, the Draft Regulation was published in the OJEU (the "Delegated Regulation 2017/2194").

    The Delegated Regulation 2017/2194 is available here.

    What's next?

    The Delegated Regulation 2017/2194 entered into force on 18 December 2017.

    The Delegated Regulation 2017/2194applies as from 3 January 2018.

  • MiFIR - ESMA’s Opinion on transparency issues for third-country trading venues

  • Background

    The post-trade transparency principles in Articles 20 and 21 of MiFIR (available here) require EU investment firms to make information on transactions in financial instruments traded on a trading venue public through approved publication arrangements ("APA"). However, Articles 20 and 21 of MiFIR do not clarify whether this obligation applies also to transactions concluded on a third-country trading venue.

    Market participants and competent authorities ("CAs") have therefore called upon the ESMA to provide guidance on the treatment of those transactions, in particular, on those third-country trading venues that are subject to transparency provisions that are similar to the post-trade transparency requirements applicable to EU trading venues as set out in Articles 6(1) and 10(1) of MiFIR.

    The ESMA is concerned that the lack of clarity regarding the treatment of those transactions is likely to result in different supervisory approaches across CAs in the application of the new transparency provisions and may undermine the establishment of a level playing field in the EU. The ESMA therefore considers it necessary to provide guidance on the matter to prevent the development of inconsistent supervisory practices across CAs and thereby contribute to supervisory convergence and strengthen the legal certainty required for the application of MiFIR.

    What's new?

    On 15 December 2017, the ESMA published its Opinion on determining third-country trading venues for the purpose of transparency under MiFIR.

    The ESMA considers that only a third-country trading venue that meets all the following objective criteria should be considered as a trading venue for the purposes of the MiFIR post-trade transparency regime:

    • It operates a multilateral system, i.e. a system or facility in which multiple third-party buying and selling interests in financial instruments are able to interact;
    • It is subject to authorisation in accordance with the legal and supervisory framework of the third-country;
    • It is subject to supervision and enforcement on an ongoing basis in accordance with the legal and supervisory framework of the third-country by a competent authority that is a full signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information ("MMoU"); and,
    • It has a post-trade transparency regime in place which ensures that transactions concluded on that trading venue are published as soon as possible after the transaction was executed or, in clearly defined situations, after a deferral period.

    The ESMA Opinion on transparency issues for third-country trading venues is available here.

    What's next?

    The ESMA will carry out the determination of third-country trading venues and publish the results in the course of 2018.

  • MiFIR - ESMA’s product intervention powers

  • Background

    The MiFIR will introduce product intervention powers for national competent authorities ("NCAs") and the ESMA on 3 January 2018, when it enters into force.

    The ESMA has been concerned about the provision of speculative products such as CFDs, including rolling spot forex, and binary options to retail clients for a considerable period of time and has conducted ongoing monitoring and supervisory convergence work in this area. Some competent authorities have also adopted national measures to limit the provision of these products to retail clients.

    Notwithstanding these actions, the ESMA remains concerned that the risks to investor protection are not sufficiently controlled or reduced. Further to the ESMA statement published in June 2017, ESMA is considering the possible use of its product intervention powers under Article 40 of MiFIR to address these investor protection risks.

    What's new?

    On 15 December 2017, the ESMA released a statement on preparatory work in relation to CFDs and binary options offered to retail clients.

    ESMA is considering the possible use of its product intervention powers under Article 40 of the MiFIR Regulation to address risks to investor protection. In particular, ESMA is considering measures to:

    • Prohibit the marketing, distribution or sale of binary options to retail clients; and
    • Restrict the marketing, distribution or sale to retail clients of CFDs, including rolling spot forex.

    The restrictions on CFDs currently under review are:

    • Leverage limits on the opening of a position between 30:1 and 5:1, whose limit will vary according to the volatility of the underlying asset,
    • A margin close-out rule,
    • negative balance protection to provide a guaranteed limit on client losses,
    • A restriction on benefits incentivising trading, and
    • A standardised risk warning.

    Any product intervention measure adopted by ESMA under Article 40 of MiFIR can have an initial duration of up to three months and is renewable.

    The ESMA statement on preparatory work in relation to CFDs and binary options offered to retail clients is available here.

    What's next?

    The ESMA will conduct a public consultation in January 2018 on this matter.

  • MiFIR - Parliament raises no objections to delegated regulation on the trading obligation for certain derivatives

  • Background

    The Regulation (EU) No 600/2014 on markets in financial instruments entered into force on 2 July 2014 and will apply as from 3 January 2018 ("MiFIR", available here).

    Pursuant to Article 32(1) of MiFIR, the European Securities and Markets Authority (the "ESMA") shall develop regulatory technical standards ("RTS") specifying the derivatives that should be subject to the trading obligation as referred to in Article 28 of MiFIR, and the date(s) from which the trading obligation takes effect.

    On 28 September 2017, the ESMA published its final report concerning the draft RTS on the trading obligation for derivatives under MiFIR (ESMA70-156-227 – the "Draft RTS", available here).

    In the Draft RTS, the ESMA identified certain interest rate swaps ("IRS") and Index Credit Default Swaps ("CDS") that should be subject to the trading obligation under MiFIR.

    • Fixed-to-float IRS denominated in EUR;
    • Fixed-to-float IRS denominated in USD;
    • Fixed-to-float IRS denominated in GBP; and
    • Two Index CDS – iTraxx Europe Main and iTraxx Europe Crossover.

    On 17 November 2017, based on the Draft RTS, the European Commission issued its delegated regulation supplementing MiFIR with regards to RTS on the trading obligation for certain derivatives (C(2017) 7684 final – the "Delegated Regulation", available here with its Annex, available here).

    Compared to the Draft RTS, it is to be noted that a second paragraph in Article 1 of the Delegated Regulation was added as follows:

    "A derivative referred to in Table 1, Table 2 and Table 3 of the Annex shall be deemed to have a tenor of 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 15, 20 or 30 years where the period of time between the date at which the obligations under that contract come into effect and the termination date of that contract equals one of those periods of time, plus or minus five days".

    What's new?

    On 13 December 2017, the European Parliament adopted a decision declaring that it has no objections to the Delegated Regulation of 17 November 2017 (P8_TA-PROV(2017)0489, the "Decision").

    The Decision is available here.

    What's next?

    The final version of the Delegated Regulation (and its Annex) entered into force on the day following that of its publication in the OJEU and applies as from 3 January 2018.

  • MiFIR - ESMA issues statement on LEI

  • Background

    The obligation for EU investment firms to identify their clients (that are legal persons) with the Legal Entity Identifiers ("LEI") is enshrined in the Markets in Financial Instruments Regulation ("MiFIR", available here). An investment firm shall not provide any service triggering the obligation to submit a transaction report for a transaction entered into on behalf of a client who is eligible for the LEI code, prior to obtaining the LEI code from that client.

    Trading venues equally are obliged to identify each issuer of a financial instrument traded on their systems with an LEI code when making daily data submission to the Financial Instruments Reference data System ("FIRDS").

    These requirements have an impact on all clients of EU investment firms and any entity issuing financial instrument traded on European trading venues. The EU investment firms and EU trading venues are obliged to report the LEI codes of these entities regardless of where the clients or issuers are based and regardless of whether they are subject to LEI requirements in their own jurisdiction.

    In the last weeks, the ESMA and national competent authorities ("NCAs") received a number of indications that not all investment firms will succeed in obtaining LEI codes from all their clients that are legal persons ahead of 3 January 2018. At the same time, these firms might be approached by such clients after 3 January 2018 with the request to provide a service triggering the obligation to submit a transaction report. Similarly, the ESMA and NCAs are aware of the concerns raised by some trading venues that additional time might be required to reach out to non-EU issuers whose financial instruments are traded on European trading venues in order to inform them about the applicable MiFIR and Market Abuse Regulation ("MAR") requirements and obtain their LEI codes.

    What's new?

    On 20 December 2017, the ESMA published a statement to support the smooth introduction of the LEI requirements under MiFIR (the "Statement").

    The ESMA will allow for a temporary period of six months that:

    • Investment firms may provide a service triggering the obligation to submit a transaction report to the client, from which it did not previously obtain an LEI code, under the condition that before providing such service the investment firm obtains the necessary documentation from this client to apply for an LEI code on his behalf; and
    • Trading venues report their own LEI codes instead of LEI codes of the non-EU issuers while reaching out to the non-EU issuers.

    The Statement is available here.

  • PRIIPs - ESAs publish third set of guidance

  • Background

    The Regulation (EU) No 1286/2014 entered into force on 29 December 2014 (the "PRIIPs Regulation", available here).

    The PRIIPs Regulation lays down uniform rules on the format and content of the key information document for PRIIPs ("KID") to be drawn up by PRIIPs manufacturers, and on the provision of the KID to retail investors in order for them to better understand and compare the key features and risks.

    On 2 May 2017, the Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing the PRIIPs Regulation entered into force (the "Delegated Regulation 2017/653", available here).

    On 4 July 2017, the European Supervisory Authorities ("ESAs") published their first questions & answers' document relating to the implementation of the PRIIPs KID (JC 2017 21 – the "Q&A v1", available here).

    On 18 August 2017, the ESAs issued further guidance on the KID requirements for PRIIPs laid down in the Delegated Regulation 2017/653 as follows:

    • Additional Q&As (JC 2017 49 – the "Q&A v2", available here);
    • Diagrams explaining the risk and reward calculations required to prepare the KID, and including example calculations (the "Diagrams", available here).

    What's new?

    On 21 November 2017, the ESAs published their third set of Q&As in relation to the PRIIPs KID (JC 2017 49 – the "Q&A v3").

    In the Q&A v3, the ESAs provide clarification on the following topics:

    • General topics:
      •  Question 2 on investment products listed on a regulated market;
      • Question 3 on the meaning/use of the terms "biometric risk premium" and "insurance premium".
    • Market risk assessment (annex II, part 1):
      • Product categories - Question 13 on the treatment of credit-linked notes for the purposes of the market risk measures ("MRM") calculation;
      • MRM class determination - Question 8 on the correction for risk neutrality at intermediate holding periods.
    • Performance scenarios (annex IV):
      • Question 3 on the calculation of trading periods to use (point 9 of annex IV);
      • Question 4 on the application of the term "rolling" (point 10(c) of annex IV).
    • Derivatives:
      • Question 4 on the limited adjustments to the prescribed wording in the KID template for OTC derivatives, where applicable (i.e. as regards the presentation of the SRI in annex III, the presentation of performance scenarios in annex V, and the presentation of costs in annex VII).
    • Multi-option products ("MOPs"):
      • Question 1 on the provision of information on the underlying options of a MOP;
      • Question 2 on the presentation of costs for investment options in the generic KID.

    The Q&A v3 is available here.

    What's next?

    The PRIIPs Regulation and the Delegated Regulation 2017/653 applied as from 1 January 2018.

    The ESAs will continue to assess whether further guidance is needed, in particular based on additional questions received.

  • Prospectus - ESMA consults on draft RTS

  • Background

    The Prospectus Regulation (available here) entered into force on 20 July 2017. The Regulation requires the ESMA to submit draft regulatory technical standards ("RTS") on key financial information for the prospectus summary, data for classification of prospectuses and the practical arrangements to ensure that such data is machine readable, provisions concerning advertisements and situations where a significant new factor, material mistake or material inaccuracy relating to the information included in the prospectus require a supplement to the European Commission by 21 July 20181. The ESMA is additionally permitted to submit draft RTS further specifying the requirements relating to the publication of the prospectus.

    According to Article 10 of Regulation (EU) No 1095/2010, the ESMA must conduct a public consultation before submitting draft RTS to the European Commission. This Consultation Paper therefore seeks stakeholders’ views on the ESMA’s proposals for such RTS. The input from stakeholders will help the ESMA finalise the draft RTS before submitting them to the European Commission.

    What's new?

    On 14 December 2017, the ESMA published a Consultation Paper on draft regulatory technical standards under the new Prospectus Regulation.

    These RTS set out a number of requirements proposals concerning the following topics:

    • Key financial information that should appear in the summary of the prospectus.
    • Advertisements relating to public offers or admission to trading.
    • Situations which require the publication of a supplement to a prospectus.
    • Publication of a prospectus.

    The ESMA Consultation Paper on draft regulatory technical standards under the new Prospectus Regulation is available here.

    What's next?

    The ESMA will consider all responses received by 9 March 2018.

  • Supervisory Reporting - Commission launches a Consultation on Fitness check of supervisory reporting

  • Background

    The financial crisis triggered the adoption of more than 40 new pieces of EU legislation to restore financial stability and public confidence in the financial system. These included (i) an improved regulatory framework for banks, insurance, securities markets and asset managers; (ii) a single supervisory mechanism for large and systemic banks; (iii) new tools for bank resolution and more effective deposit protection; (iv) enhanced protections for consumers and increased transparency.

    On 30 September 2015, the European Commission (the "Commission") published a call for evidence on the EU regulatory framework for financial services. Its purpose was to gather feedback from stakeholders on whether the EU legislation adopted since the financial crisis was working consistently and coherently, what was its combined impact and if it gave rise to any unintended consequences (COM(2016) 855 final – the "Call for Evidence", available here).

    On 23 November 2016, the Commission published a communication (COM(2016) 855 final – the "Communication", available here) and an accompanying staff working document (SWD(2016) 359 final – the "Working Document", available here) to follow up to the Call for Evidence. The Commission noted that one of the key challenges highlighted by the respondents of the Call for Evidence was supervisory reporting. Main concerns in this field included overlaps and inconsistencies between reporting requirements in particular pieces of financial legislation, excessive number of requirements, as well as insufficient clarity as to what needs to be reported and an insufficient use of standards. This causes excessive compliance costs and complexity and does not provide sufficiently qualitative data to supervisors and regulators to fulfil their mandates.

    What's new?

    On 1 December 2017, the Commission published a report on the follow-up to the Call for Evidence (COM(2017) 736 final, the "Report") and a consultation document on fitness check of supervisory reporting (the "Consultation Document").

    The Report informed that building on the results of the Call for Evidence, the Commission has launched a high level fitness assessment of various but interlinked supervisory reporting frameworks (the "Fitness Check"). The Fitness Check focuses on specific products or areas of supervisory reporting (e.g. derivatives) and includes a comprehensive overview of the key sources of costs and burdens of it.

    An important input to the Fitness Check is to be obtained from responses to the Consultation Document. The Consultation Document includes 3 sections reflecting the main challenges identified with respect to the EU supervisory framework. The Consultation Document seeks to:

    • Assess if existing supervisory reporting requirements – in particular in light of the fairly recent move to more granular reporting frameworks – are working as intended (in order to do so, it seeks to assess their effectiveness, relevance, efficiency, coherence, and added value);
    • Gather concrete quantitative data concerning the compliance costs incurred by the end of 2016 for reporting frameworks in force by this date (it includes investments into IT systems and related areas such as hiring, training, updating work processes or services delivered by external contractors);
    • Obtain stakeholders' suggestions on possible future developments in supervisory reporting, in particular with regards to greater use of ICT and greater automation as possible ways to simplify and streamline supervisory reporting.

    The Consultation Document is aimed primarily at stakeholders directly or indirectly involved in supervisory reporting, either on the reporting side or on the side receiving and/or processing the reported data, such as financial institutions, non-financial institutions undertaking securities or derivative transactions, central counterparties ("CCPs"), trade repositories, trading venues, national and EU supervisory and regulatory bodies.

    The Report is available here.

    The Consultation Document is available here.

    What's next?

    The responses to the Consultation Document are to be submitted by 28 February 2018.

    The work of Fitness Check is scheduled for completion by the end of 2018, at which time the results will be published in a staff working document.

  • LUXEMBOURG

    AML/CFT - Bill 7216 on the Register of trusts submitted to Parliament

  • Background

    The Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing applies since 26 June 2017 (the "4AMLD", available here).

    According to Article 31(1) of the 4AMLD, EU Member States shall require that trustees of any express trust governed under their law obtain and hold adequate, accurate and up-to-date information on beneficial ownership regarding the trust.

    At international level, pursuant to the FATF Recommendation 25 (available here), countries should ensure that there is adequate, accurate and timely information on express trusts, including information on the settlor, trustee and beneficiaries, that can be obtained or accessed in a timely fashion by competent authorities.

    At Luxembourg level, the law of 27 July 2003 concerning the trust and fiduciary contracts was modified by the Law of 22 March 2004 on securitisation (the "2003 Law", available here only in French). In addition, as the omnibus bill 7128 transposing most notably the 4AMLD is still under discussion at the Chamber of Deputies (the "Bill 7128", available here only French), the definitions included in the modified Law of 12 November 2004 on the fight against money laundering and terrorist financing still apply (the "2004 Law", available here).

    What's new?

    On 6 December 2017, the Luxembourg Minister of Justice submitted the bill 7216, establishing a register of "express" trusts (the "Register") and transposing Article 31 of 4AMLD, to the Luxembourg Parliament (the "Bill 7216").

    The Bill 7216 is divided into the 6 following chapters:

    • Chapter 1 – Definitions (e.g. "trustees" and "express trust" as referred to in Article 5 of the 2003 Law and in accordance with Article 31 of the 4AMLD, or "beneficial owner" as defined in Article 1(7) of the 2004 Law);
    • Chapter 2 – Obtaining and keeping "adequate, exact and up-to-date" information on beneficial owners by trustees (e.g. when the beneficiaries are designated by characteristics or by categories, the trustee shall obtain and keep sufficient information to be able to establish the identity of those persons at the time the benefits are paid or when they intend to exercise acquired rights);
    • Chapter 3 – Creation of the Register held by the Luxembourg Registration and Estates Administration (i.e. "Administration de l’enregistrement et des domaines" or "AED" in French);
    • Chapter 4 – Registering and keeping information in the Register (e.g. each trust whose trustee is established in Luxembourg and which generates tax consequences shall be registered in the Register and is assigned a unique registration number);
    • Chapter 5 – Access to the Register (e.g. national authorities as referred to in Article 1(1) of the Bill 7216 shall have access in the performance of their tasks to the information contained in the Register);
    • Chapter 6 – Other and transitional provisions (e.g. Article 27 of the Bill 7216 allows supervisory authorities to exchange any information necessary for the accomplishment of their tasks provided for by the proposed law and the Law of 2004).

    The Bill 7216 is available here (only in French).

    What's next?

    The Luxembourg Conference of Presidents will order the Bill 7216 referral to a parliamentary committee for discussion.

    As indicated in Article 29 of the Bill 7216, trustees shall have 6 months after the entry into force of the law establishing the Register to comply with the provisions of Chapters 2 and 4 of the Bill 7216.

    Certain provisions of the law establishing the Register (e.g. how the trustees shall register or modify relevant information in the Register, or the access modalities to the Register by national authorities) shall be further specified by Grand-Ducal regulation(s).

  • AML/CFT - Bill 7217 on the register of beneficial owners’ information (REBECO) submitted to Parliament

  • Background

    The Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing applies since 26 June 2017 (the "4AMLD", available here).

    According to Article 30(1) of the 4AMLD, EU Member States shall ensure that corporate and other legal entities incorporated within their territory are required to obtain and hold adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held.

    At international level, pursuant to the FATF Recommendation 24 (available here), countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.

    At Luxembourg level, as the omnibus bill 7128 transposing most notably the 4AMLD is still under discussion at the Chamber of Deputies (the "Bill 7128", available here only French), the definitions included in the modified Law of 12 November 2004 on the fight against money laundering and terrorist financing still apply (the "2004 Law", available here).

    What's new?

    On 6 December 2017, the Luxembourg Minister of Justice submitted the bill 7217 concerning the "Registre des bénéficiaires effectifs" ("REBECO") to the Luxembourg Parliament (the "Bill 7217").

    The purpose of the Bill 7217 is (i) to transpose certain provisions of the 4AMLD relating to the register of information on beneficial owners of companies and other legal entities (i.e. REBECO) and their obligations in relation to their beneficial owner(s), and (ii) to modify the Law of 19 December 2002 on the Luxembourg trade and companies register and the accounting and annual accounts of undertakings, as amended (the "2002 Law", available here only in French).

    The functioning of the REBECO is described in Articles 1 to 19 of the Bill 7217, which are comprised of the 6 following chapters:

    • Chapter 1 – Definitions (e.g. "beneficial owner" as defined under Article 1(7) of the 2004 Law, or "incorporated entities" as referred to in points 2 to 4, 6 to 13 and 15 of Article 1 of the 2002 Law including commercial companies);
    • Chapter 2 – Creation of the REBECO under the authority of the Luxembourg Minister of Justice;
    • Chapter 3 – Registration and record of information on beneficial owners in the REBECO (e.g. additional information as set out in point 2, 4, 7, 9 and 10 of Article 3 of the Bill 7217 compared to the minimum information required in Article 30(5) of 4AMLD);
    • Chapter 4 – Access to the REBECO (e.g. direct access for national authorities and certain self-regulatory bodies and professionals, or indirect access via the "Commission de coordination" for resident persons having demonstrated a legitimate interest under the conditions of Article 15 of the Bill 7217);
    • Chapter 5 – Specific provisions on the functioning of the REBECO (e.g. creation of the "Commission de coordination", or remuneration of the REBECO manager);
    • Chapter 6 – Protection of personal data (with reference to the modified Luxembourg Law of 2 August 2002 on the protection of persons with regard to the processing of personal data).

    In addition, Articles 20 to 22 of the Bill 7217 introduce new obligations for incorporated entities by obliging them to keep and make available exact and up-to-date information on their own beneficial owners. The criminal provisions laid down in Articles 23 to 25 of the Bill 7217 are part of the mechanisms (e.g. fines up to € 1’250’000 in case of transmission of inaccurate or non-current information by the incorporated entity or its representative(s)) aimed at ensuring the effectiveness of the Bill 7217. Lastly, the Bill 7217 proposes some technical amendments to the 2002 Law.

    The Bill 7217 is available here (only in French).

    What's next?

    The Luxembourg Conference of Presidents will order the Bill 7217 referral to a parliamentary committee for discussion.

    As indicated in Article 27 of the Bill 7217, incorporated entities (as defined under Article 1(4) of the Bill 7217) shall comply with the new requirements within 6 months after the entry into force of the law. The opening of the REBECO to consultation will only take place at the end of this period of 6 months.

    Certain provisions of the law establishing the REBECO (e.g. the list of supportive documents to be provided in order to register or modify the information on beneficial owners in the REBECO) shall be further specified by Grand-Ducal regulation(s).

  • Company Law - Grand-Ducal Regulation on the modified Law of 10 August 1915 published in the Memorial A

  • Background

    On 23 August 2016, the Luxembourg law of 10 August 2016, which modernises the amended law of 10 August 1915 on commercial companies (the "1915 Law"), the Civil Code, and the amended law of 19 December 2002 on the trade and companies' register and the accounting and annual accounts of undertakings, entered into force (the "2016 Law", available here only in French).

    In particular, pursuant to Article IV of the 2016 Law, the Grand Duke of Luxembourg is authorized to coordinate the text of the 2016 Law.

    What's new?

    On 15 December 2017, the Grand-Ducal regulation of 5 December 2017 coordinating the text of the 1915 Law was published in the Memorial A N° 1066 (the "Regulation").

    It is to be noted that the Regulation contains the following four annexes:

    • Annex 1 – Text of the 1915 Law according to the new numbering introduced by the Regulation;
    • Annex 2 – Table of content of the 1915 Law according to the new numbering introduced by the Regulation;
    • Annex 3 – Concordance table between the old and the new numbering concerning the Articles of the 1915 Law;
    • Annex 4 – Summary of the various laws amending the 1915 Law.

    The Regulation is available here (only in French).

    What's next?

    The Regulation entered into force on 19 December 2017.

  • Financial Stability - ALFI responds to Commission Regulation proposal enhancing ESAs' powers

  • Background

    From 21 March to 16 May 2017, the European Commission (the "Commission") carried out a public consultation on the operations of the European Supervisory Authorities (the "ESAs"), their powers, governance, supervisory architecture and funding (Feedback statement is available here).

    On 20 September 2017, the Commission published its proposal for a regulation setting out revisions of the ESAs Regulations (e.g. the "ESMA Regulation", available here) and various related sector acts (COM(2017) 536 final – the "Proposed Regulation", available here).

    What's new?

    On 5 December 2017, the Association of the Luxembourg fund industry (the "ALFI") published its response to the Proposed Regulation (the "ALFI Response").

    Overall, the ALFI is of the view that "any change to the current regulatory framework of the European asset management industry should focus on the needs and best interests of investors in order to provide safe, high quality investment products and access to best-in-class professional investment management expertise and related services coupled with strict oversight".

    In addition, the ALFI Response expresses views on the following topics:

    • Delegation, outsourcing and risk transfer;
    • Subsidiarity principle and national competent authority ("NCA") oversight;
    • Further transfer of NCAs' powers to an executive board of the ESAs;
    • Direct ESMA supervision of European venture capital funds ("EuVECAs"), European social entrepreneurship funds ("EuSEFs") and European long-term investment funds ("ELTIFs");
    • ESMA review of delegation arrangements to third countries in relation to Undertakings for Collective Investment in Transferable Securities ("UCITS") and Alternative Investment Funds ("AIFs").

    The ALFI Response is available here.

    What's next?

    The Commission has put the Proposed Regulation forward for adoption by the European Parliament and the Council of the EU.

  • Financial Stability - Bill 7218 relating to macro-prudential measures on residential real estate loans submitted to Parliament

  • Background

    In November 2016, the European Systemic Risk Board ("ESRB") identified in 8 Member States, including Luxembourg, certain medium-term vulnerabilities relating to residential real estate as a source of systemic risk to financial stability (available here). From a macro-prudential perspective, the ESRB considers the main vulnerabilities in Luxembourg to be a combination of high residential real estate prices and increasing household indebtedness.

    At international level, the IMF published its report concerning Luxembourg Financial Sector Assessment Program ("FSAP") on 15 May 2017 (available here). In particular, the IMF recommended that Luxembourg should continue (i) to strengthen risk-based monitoring of the residential real estate market, and (ii) to monitor the ability of banks to absorb a real estate market price decline.

    At Luxembourg level, in accordance with Article 59-2(10) of the law of 5 April 1993 on the financial sector, as amended (the "1993 Law", available here), the CSSF is currently the "designated authority" referred to in Articles 131, 133 and 136 of the Directive 2013/36/EU ("CRD", available here) and in Article 458 of the Regulation (EU) No 575/2013 ("CRR", available here). In addition the law of 1 April 2015 established a Luxembourg Systemic Risk Board ("SRB") and amended the law of 23 December 1998 concerning the monetary status and the Banque centrale du Luxembourg ("BCL") (the "2015 Law", available here).

    What's new?

    On 11 December 2017, the Luxembourg Minister of Finance submitted the bill 7218 concerning macro-prudential measures on residential real estate loans to the Luxembourg Parliament (the "Bill 7218").
    The Bill 7218 amends the 1993 Law and the 2015 Law as follows:

    • Upon recommendation of the SRB, the CSSF is empowered to establish conditions for the granting of loans in relation to residential real estate located in Luxembourg (in concertation with the BCL and/or the "Commissariat aux assurance", as the case may be);
    • The proposed macro-prudential measures would apply to credit institutions, insurance companies and professionals performing loan operations ("borrower based measures");
    • Upon recommendation of the SRB, the CSSF can ask national authorities in other Member States to recognise any conditions for the granting of loans in respect of immovable property located in Luxembourg. Reciprocally, upon recommendation of the SRB, the CSSF can recognise the conditions laid down in other Member States for the granting of credits relating to immovable property situated in those Member States;
    • The Bill 7218 provides the BCL with a right of access to data aggregates available from state administrations, public institutions other than those under the supervision of the communes and other national competent authorities, provided that this information is necessary for its research and analysis activities related to the mission of the SRB.

    The Bill 7218 is available here (only in French).

    What's next?

    The Luxembourg Conference of Presidents will order the Bill 7218 referral to a parliamentary committee for discussion.

  • MiFID II/MiFIR - CSSF issues circular 17/674 on transaction reporting, order record keeping and clock synchronisation

  • Background

    The Directive 2014/65/EU ("MiFID II", available here) and the Regulation (EU) 600/2014 ("MiFIR", available here) entered into force on 2 July 2014 and will apply as from 3 January 2018.

    Against this background, the following 3 Commission delegated regulations entered into force on 20 April 2017:

    • Commission delegated regulation (EU) 2017/574 supplementing MiFID II with regard to regulatory technical standards ("RTS") for the level of accuracy of business clocks (the "Delegated Regulation 2017/574", available here);
    • Commission delegated regulation (EU) 2017/580 supplementing MiFIR with regard to RTS for the maintenance of relevant data relating to orders in financial instruments (the "Delegated Regulation 2017/580", available here);
    • Commission delegated regulation (EU) 2017/590 of supplementing MiFIR with regard to RTS for the reporting of transactions to competent authorities (the "Delegated Regulation 2017/590", available here).

    On 7 August 2017, the ESMA corrected its guidelines on transaction reporting, order record keeping and clock synchronization under MiFID II (ESMA/2016/1452 – the "Guidelines", available here).

    What's new?

    On 1 December 2017, the CSSF published its circular 17/674 on transaction reporting, order record keeping and clock synchronisation under the MiFID II/MiFIR framework (the "Circular 17/674").

    The Circular 17/674 is addressed to all (i) credit institutions, (ii) investment firms, (iii) approved reporting mechanisms, (iv) regulated markets, (v) market operators, (vi) credit institutions and investment firms operating an MTF or an OTF, and (vii) branches of third country firms.

    The purpose of the Circular 17/674 is twofold:

    • Transpose the Guidelines in relation to the submission of transaction reports pursuant to Article 26 of MiFIR, record keeping of orders pursuant to Article 25 of MiFIR and synchronisation of business clocks pursuant to Article 50 of MiFID II into the Luxembourg regulatory framework; and
    • Provide details on the obligation to report transactions pursuant to Article 26 of MiFIR with regard to the reporting of transactions involving branches and the modalities to be observed for the transmission of transaction reports to the CSSF:
      • Prior to sending the first transaction report file under the new MiFID II/MiFIR regulatory framework to the CSSF, credit institutions and investment firms incorporated under Luxembourg law as well as branches of third country firms authorised in Luxembourg, whether they submit their transactions directly to the CSSF or through an approved reporting mechanism or the trading venue through whose systems the transaction was completed, must inform the CSSF by sending the duly completed Transaction Reporting Form (available here) to the e-mail address transactionreporting(at)cssf.lu.This form must be notified to the CSSF as soon as possible and by 11 December 2017 at the latest;
      • The persons concerned must inform the CSSF immediately of any change by sending an updated version of the above form;
      • In addition, they are required to confirm each year, by 31 January at the latest, that the information provided in their last notification remains relevant;
      • Trading venue operators falling under the supervision of the CSSF follow the same procedure when they have to report to the CSSF transactions relating to financial instruments traded on their venue which are executed through their systems by firms which are not subject to MiFIR;
      • To submit transaction reports to the CSSF, any declarant must take into account the new version of the TAF Handbook (available here).

    The Circular 17/674 is available in English here and in French here.

    The corresponding updated CSSF Handbook is available here.

    What's next?

    The Circular 17/674 entered into force on 1 December 2017.

  • MiFID II/MiFIR - CSSF reminds about mandatory use of LEI for transaction reporting

  • Background

    The Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories applies since 16 August 2012 ("EMIR", available here).

    The European Commission (the "Commission") has issued delegated acts on reporting under EMIR. It has been supplemented by the Commission Delegated Regulation (EU) 2017/104 of October 2016 with regard to regulatory technical standards on the minimum details of the data to be reported to trade repositories (available here). On 19 October 2016, the Commission issued the Implementing Regulation (EU) 2017/105 laying down implementing technical standards with regard to the format and frequency of trade reports to trade repositories (available here). These delegated acts apply since 1 November 2017.

    The Directive 2014/65/EU on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU ("MiFID II", available here) and the Regulation (EU) No 600/2014 on markets in financial instruments and amending EMIR ("MiFIR", available here) shall apply as of 3 January 2018.

    MiFID II/MiFIR require investment firms to obtain a legal entity identifier ("LEI") from their clients prior to providing services which would trigger related transaction reporting duties, notably, the obligation to report transactions is addressed in Article 26 of MiFIR. LEI is a unique 20-character alpha-numeric code which allows for the identification of legally independent entities across global financial markets. As from 3 January 2018, market participants will not be able to trade with in-scope investment firms, without a LEI. Moreover, according to EMIR, as from 1 November 2017 the EU trade repositories are mandated to reject trade reports without a LEI.

    With reference to the upcoming entry into force of MiFID II/MiFIR, on 9 October 2017, the European Securities and Markets Authority (the "ESMA") released a briefing providing information to various entities required to use LEI (ESMA70-145-238 — the "ESMA Briefing", available here).

    On 12 October 2017, the Commission de Surveillance du Secteur Financier (the "CSSF") issued a first communication on mandatory use of LEI under MiFID II/MiFIR and EMIR (the "1st Communication", available here). In the context of the ESMA Briefing the 1st Communication focused on EMIR and reminded that: (i) under the new EMIR reporting requirements, the LEI will be mandatory as of 1 November 2017 to identify the counterparty in a derivative transaction and (ii) in order to accept the EMIR reports, trade repositories will check the LEI of the reporting counterparty with Global LEI Foundation’s ("GLEIF") web-based database.

    What's new?

    On 29 November 2017, the CSSF issued a second communication on MiFID II/MiFIR mandatory LEI for transaction reporting (the "2nd Communication").

    In the 2nd Communication, the CSSF noted that MiFID II/MiFIR including the transaction reporting regime set out under Article 26 of MiFIR will enter into force on 3 January 2018. In this context, and pursuant to the 1st Communication and the ESMA Briefing, the CSSF reminded to credit institutions and investment firms that the use of a LEI is mandatory under MiFIR for the submission of transaction reports to the CSSF and for the execution of transactions on financial instruments on behalf of clients which are legal entities.

    The 2nd Communication is available here.

  • WORLD

    Investment Funds - IOSCO issues 4th survey on global hedge fund industry

  • Background

    Given the lack of public and global data on hedge fund activities, the IOSCO believes that the regular collection and analysis of hedge fund data by regulators remains an important building block to observe trends in the sector and better understand any potential systemic risks that hedge funds may pose to the financial system.

    Against this background, the IOSCO hedge funds surveys (the "Survey") have been published biannually, starting with data from 30 September 2010. The latest Survey was published on 11 December 2015 (the "3rd Survey", available here).

    What's new?

    On 23 November 2017, the IOSCO issued its fourth iteration of the Survey based on data as of 30 September 2016 (FR22/2017 – the "4th Survey").

    In the 4th Survey, the IOSCO highlights the following results:

    • Global assets under management ("AuM") of hedge funds captured rose 24% to $3.2 trillion;
    • Cayman Islands makes up 53% of the global total by net asset value ("NAV");
    • Equity long/short is the most widely used investment strategy, followed by global macro and fixed income arbitrage;
    • Gross leverage of the hedge funds is 7.1x NAV (This figure includes the notional values of interest rate and FX derivative contracts. Removing those from the data, gross leverage was 3.1x and net leverage was 1.1x.);
    • At an aggregate level, there is a considerable liquidity buffer, suggesting that in normal market conditions hedge funds should be able to meet investor redemptions;
    • As of the measurement date, 3.8% of hedge fund assets had constrained redemptions through the use of liquidity management tools, such as gates, suspensions, or side pockets.

    The 4th Survey is available here.

    What's next?

    The IOSCO should publish its 5th Survey in Q4 2019.

  • Investment Funds - IOSCO proposes good practices on the voluntary termination of investment funds

  • Background

    With reference to Principle 25 of the IOSCO Objectives and Principles of Securities Regulation (available here), the IOSCO recognises the importance for investment funds to have termination procedures in place from an investor protection perspective.

    Voluntary terminations typically occur because an investment fund, although still solvent, is no longer economically viable or can no longer serve its intended objectives. In this context, the investment fund is terminated in accordance with the provisions in its constitutional document and/or prospectus in conjunction with the legal/regulatory processes in place for the orderly termination of investment funds in that jurisdiction.

    What's new?

    On 23 November 2017, the IOSCO issued its report on good practices for the termination of investment funds that seek to protect investors’ interests during this process (FR23/2017 – the "Report").

    The Report proposes 14 good practices for the voluntary termination of open-ended and closed-ended investment funds (i.e. collective investment schemes and other fund structures such as commodity, real estate and hedge funds), as legislation at national level in most jurisdictions addresses involuntary terminations (e.g. those caused by insolvency).

    The 14 good practices are divided into the following 5 categories and listed in the appendix to the Report:

    • Disclosure at time of investment;
    • Decision to terminate;
    • Decision to merge;
    • During the termination process;
    • Specific types of investment funds.

    The Report is available here.

    What's next?

    The IOSCO good practices do not override national or regional legal or regulatory requirements and/or insolvency regimes.

  • OTC derivatives - BCBS-CPMI-FSB-IOSCO launch surveys to evaluate the effect of regulatory reforms to incentives for central clearing

  • Background

    In September 2009, in response to the global financial crisis, the G20 leaders agreed that standardised over-the-counter ("OTC") derivatives contracts should be cleared through central counterparties ("CCPs") helping to manage the risk that can arise if one party defaults on its payments (the "G20 Pittsburgh Statement", available here). Since that time, a number of regulatory reforms have been advanced and they are likely to affect the incentives for central clearing of these contracts.

    The incentives for central clearing of OTC derivatives in the changing environment are jointly analysed and related policy work is done by the Financial Stability Board ("FSB"), the Basel Committee on Banking Supervision ("BCBS"), the Committee on the Global Financial System ("CGFS"), the International Organization of Securities Commissions ("IOSCO") and the Committee on Payments and Market Infrastructures ("CPMI").

    In October 2014, a Group comprised by members of the FSB-BCBS-CGFS-IOSCO-CPMI reported on whether the post-crisis regulatory reforms developed by global standard-setting bodies create appropriate incentives for different types of market participants to centrally clear OTC derivatives contracts (the "2014 Report, available here).

    On 22 September 2015, the FSB-BCBS-CPMI-IOSCO published a CCP work plan (the "Work Plan", available here). They planned to coordinate international policy work relating to CCP and focused on resilience, recovery planning and resolvability.

    On 3 July 2017, the FSB presented a framework for post-implementation evaluation of the effects of the G20 financial regulatory reforms (the "Evaluation Framework", available here).

    On 5 July 2017, the FSB-BCBS-CPMI-IOSCO reported on the implementation of the Work Plan, noting that it is largely completed and that the next phase shall include further work to assess incentives to clear centrally arising from the interaction of post-crisis reforms (the "Report on Work Plan", available here).

    On 18 August 2017, it was announced that the FSB-BCBS-CPMI-IOSCO have agreed to carry out an evaluation (the "Evaluation") under the Evaluation Framework considering the effects of the interaction of the post-crisis regulatory reforms on incentives to centrally clear OTC derivatives (the "Announcement", available here). It is critical for the Evaluation to have sufficiently granular data to identify the incentives that may be present for different asset classes or product types, hence the study is to include qualitative surveys.

    What's new?

    On 14 December 2017, to support the Evaluation, the BCBS-CPMI-FSB-IOSCO launched qualitative surveys to be completed by different participants in central clearing. The surveys cover areas such as the effects of G20 reforms on derivatives markets, client clearing service provision, and other market structure issues and observations.

    Survey responses should be provided on a group-wide basis. Respondents are encouraged to complete the survey that best fits their main role in derivatives markets:

    • Clearing member survey
      • § As OTC derivatives dealer (the "Dealer Survey", available here);
      • As client clearing service provider (the "CCSP Survey", available here);
    • Central counterparty (the "CCP Survey", available here);
    • End-user (the "Client Survey", available here).

    Were a respondent considers itself to be active in more than one role and wishes to respond to more than one survey, then it may do so, but still providing responses on a group-wide basis in each case.

    The instructions for responding the surveys are available here.

    What's next?

    The deadline for survey responses is 17.00 CET on Friday 26 January 2018.

    The Evaluation's final report is expected to be completed in late 2018.

  • TAX: LUXEMBOURG

    CbCR - Additional information required by the Luxembourg tax administration

  • Background

    On 13 December 2016, the Luxembourg Parliament passed a legislation implementing Country-by-Country Reporting ("CbCR") requirements for Luxembourg entities that are part of a Multinational Enterprise ("MNE") Group. The Luxembourg CbC obligations require Luxembourg ultimate parent company controlling a MNE group whose total consolidated group revenue exceeds EUR 750 million to file CbC reports with the Luxembourg tax authorities. Other Luxembourg companies that are member of MNE groups may also have obligations to file CbC reports in Luxembourg.

    What's new?

    On 12 December 2017, the Luxembourg tax authority (the tax administration for direct taxes) provided additional guidance on CbCR:

    1) Additional information required with respect of the address of the constituting entities

    From now on, the Luxembourg CbCR procedure contains an obligation to disclose the postal address and the locality for the constituting entities of each jurisdiction. The purpose is to anticipate future needs in case of tax inspection and to gather data received in order to be in line with the OECD recommendations.

    Until 31 December 2017, the disclosure of these information remains optional for CbCR transmitted by manual entry or by XML file drop thought MyGuichet.lu. The new disclosure requirement will be compulsory as from 2018.

    2) New status on my Guichet

    Notifications and CbCR appear now under the status ‘transmitted and received by ACD" after analysis by l’Administration des Contributions Directes ("ACD"). From now on, the administrative procedure can be corrected, modified or adjusted at any time. It is important to highlight that a modification and/or a CbCR has to be rectified as soon as possible following the knowledge of new facts.

    The link is available here.

    What's next?

    The business actors concerned by the CbCR will have to comply with the new obligations set out by the Luxembourg tax administration as from 2018.

  • CbCR - Evolution of the agreements signed by Luxembourg

  • Background

    On 13 December 2016, the Luxembourg Parliament passed a legislation implementing Country-by-Country Reporting ("CbCR") requirements for Luxembourg entities that are part of a Multinational Enterprise ("MNE") Group.

    What's new?

    On 13 December 2017, two Grand Ducal decrees published:

    • The multilateral agreement between competent authority on automatic exchange of information related to financial accounts and the declaration signed in Berlin on 29 October 2014;
    • The multilateral agreement between competent authority on exchange of declaration country by country and the declaration signed in Paris on 27 January 2016;
    • The declaration on the effective date for exchanges of information under the multilateral competent authority agreement on automatic exchange of financial account information signed in Luxembourg on 21 December 2016;
    • The declaration on the effective date for exchanges of information under the multilateral competent authority agreement on the exchange of country-by-country reports signed in Luxembourg on 30June 2017; and
    • The arrangement between the Competent Authority of the United States of America and the Competent Authority of the Grand Duchy of Luxembourg on the exchange of country-by-country reports signed in Washington on 12 October 2017.

    The links are available here and here.

    What's next?

    It is expected that Luxembourg extends even more its network regarding CbCR in order to be in line with the BEPS recommendations.

  • Certificate of residence - New circular on Issuance of tax residence certificates for investment funds

  • Background

    On 17 February 2015, the Luxembourg’s tax authority (the tax administration for direct taxes) issued the Circular L.G.-A. n°61 which aimed at clarifying and providing new rules concerning the issuance of certificates of residence for Luxembourg Undertakings for Collective Investment (UCIs).

    What's new?

    On 8 December 2017, the Luxembourg tax administration for direct taxes published Circular L.G. - A. No. 61, replacing the existing version of 12 February 2015, providing guidance on the principles and procedures for the issuance of tax residence certificates for Luxembourg investment funds.

    The collective investment undertakings within the meaning of the law of 17 December 2010 and the law of 13 February 2007, as amended, as well as the law of 23 July 2016 relating to the reserved alternative investment funds are covered.

    The circular also gives an updated list of double tax treaties signed by Luxembourg and to which Luxembourg investment funds may be granted access.

    Moreover, the express inclusion of RAIFs in the procedures governing the issuance of certificates of residence will strengthen the success of RAIFs by providing more tax certainty.

    The link is available here.

    What's next?

    The new Circular confirms the growing list of treaty benefits available to Luxembourg UCIs. This ever-growing network is expected to facilitate the investment for corporate entities and will reinforce Luxembourg’s leader position as the gateway to Europe.

  • WORLD - Tax havens - ECOFIN Council publishes EU list of third country non-cooperative jurisdictions in tax matters

  • Background

    In January 2016, the Commission launched a three-step process for establishing the common EU list of non-cooperative jurisdictions as part of its broader agenda to curb tax evasion and avoidance. This initiative was justified by the fact that a common EU list of non-cooperative jurisdictions will carry much more weight than the existing patchwork of national lists when dealing with non-EU countries that refuse to comply with international tax good governance standards. The aim was to publish the definitive list of non-cooperative jurisdictions by the end of 2017.

    What's new?

    On 5 December 2017, the ECOFIN Council published its conclusions on the EU common list of (third country) non-cooperative jurisdictions in tax matters, also referred to as the ‘blacklist’. This initiative forms part of the EU’s broader agenda with the dual aim of raising the level of good global governance and tackling tax fraud, tax evasion and tax avoidance.

    As to fair taxation, the affected jurisdictions should amend or abolish harmful tax regimes and address the EU’s concerns relating to economic substance. Finally, as regards the implementation of anti-BEPS measures, these jurisdictions should also become members of the OECD’s Inclusive Framework and/or implement the BEPS minimum standards. The 47 jurisdictions that have made a political commitment are given until the end of 2018, or 2019 for developing countries without financial centers, to meet the EU’s criteria, in order to avoid being listed.

    The link is available here.

    What's next?

    The EU listing process will continue in 2018 with the list being reviewed at least on an annual basis. As pertains to the currently listed jurisdictions, a letter will first be sent to them outlining the decision and measures that they may take in order to be delisted.

    The Commission and the Code of Conduct Group will also closely monitor all the relevant jurisdictions to guarantee that they live up to their commitments and decide on whether new countries need to be added to the list. A first progress report is expected before the summer of 2018.

  • This publication is produced by Legal and Compliance teams of CACEIS with the kind support of Communication teams and Group Business Development Support teams.

    Editors
    Gaëlle Kerboeuf, Group Head of Litigation and Legal Projects

    Permanent Editorial Committee
    Gaëlle Kerboeuf, Group Head of Litigation and Legal Projects
    Elisabeth Raisson, CACEIS Group Compliance
    Corinne Brand, CACEIS Group Communications Specialist
    Alice Broussard, CACEIS Compliance and Regulatory Watch

    Support
    Ana Vazquez, Group Head of Legal
    Tania Delchev, Legal (France)
    Clemence Dubreuil, Legal (France)
    Malgorzata Journo, Legal (France)
    Eliane Meziani-Landez, Legal (France)
    Corentin Stefan (France)
    Sylvie Becker, Legal (Luxembourg)
    Fernand Costinha, Legal (Luxembourg)
    Stefan Ullrich, Legal (Germany)
    Costanza Bucci, Legal and Compliance (Italy)
    Mireille Mol, Legal and Compliance (Netherlands)
    Arianne Courtois (Belgium)
    François Honay, Legal (Belgium)
    Charles du Maisnil, Legal - Risk & Compliance (Belgium)
    Robin Donagh, Legal (Ireland)
    Helen Martin, Legal (Ireland)
    Samuel Zemp, Legal and Compliance (Switzerland)

    Design
    Sylvie Revest-Debeuré, CACEIS, Communications

    Photos credit
    Yves Maisonneuve, Yves Collinet, CACEIS, Adobe Stock

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