EUROPE

AIFMD - ESMA Q&A update

  • Background

    ESMA has issued and regularly updates a questions and answers ("Q&A") document aiming to promote common supervisory approaches and practices in the application of the alternative investment fund managers’ directive ("AIFMD", available here) and its implementing measures, providing responses to questions posed by the general public and competent authorities in relation to their practical application.

    The previous ESMA AIFMD Q&A update was issued on 16 December 2016.

    What's new?

    On 7 April 2017, ESMA updated its AIFMD Q&A with a new question 8 on AIFs notifications (ESMA34-32-352). 

    Some Member States have introduced further categories for retail investors such as "qualifying investor", "informed investor", or "semi-professional investor" beside the category of "professional investor". Such categories share some, but not all elements of the definition of professional investors. 

    Hence, ESMA reminds that the AIF marketing passport may only be used for marketing to professional investors as defined in Article 4(1)(ag) of AIFMD. Any other cross-border marketing activity to non-professional investors as defined in Member States has to be notified and carried out according to national legislation in the host Member State of the AIF and cannot be carried out by way of the AIF marketing passport. 

    The Q&A is available here.

    What's next?

    ESMA will update its AIFMD Q&A on a regular basis.

  • Benchmarks Regulation - ESMA issues its second final report

  • Background

    The regulation (EU) 2016/1011 on indices used as benchmark in financial instruments and financial contracts entered into force on 30 June 2016 and will apply across the EU as from 1 January 2018 (the "Benchmarks Regulation" or "BMR", available here). It introduces a common framework to ensure the accuracy and integrity of indices used as benchmarks in financial instruments and financial contracts. BMR is relevant for any investment fund that uses any benchmark for the determination of its performance, or to define asset allocation of its portfolio, or to compute its performance fees. 

    On 15 February 2016, ESMA published a discussion paper on BMR (ESMA/2016/288 - the "Discussion Paper", available here). The Discussion Paper included ESMA’s policy orientations and initial proposals for both the draft technical standards and the technical advice to the EU Commission. It was addressed to the administrators of benchmarks and to any investor dealing with financial instruments and financial contracts whose value is determined by a benchmark or with investment funds whose performance are measured by means of a benchmark. 

    On 27 May 2016, ESMA published a first consultation paper on BMR focusing on the technical advice to the EU Commission (ESMA/2016/723 - the "Consultation Paper 1", available here). 

    On 29 September 2016, ESMA published a second consultation paper on BMR with respect to ESMA’s draft technical standards (ESMA/2016/1406 - the "Consultation Paper 2", available here). 

    On 10 November 2016, ESMA published a final report with respect to ESMA’s technical advice to the EU Commission, which is the follow-up of the Consultation Paper 1 (ESMA/2016/1560 - the "Final Report 1", available here).

    What's new ?

    On 30 March 2017, ESMA published its second final report on draft technical standards under BMR, which is the follow-up of the Consultation Paper 2 (ESMA70-145-48, the "Final Report 2", available here). 

    What's next?

    The 11 draft technical standards contained in the Final Report 2 have been submitted to the EU Commission, which has three months to decide whether or not to endorse them. 

    Delegated acts on BMR should be adopted by the EU Commission so that they enter into application by 1 January 2018. 

  • CMU - Parliament Plenary approves final text of the Prospectus regulation

  • Background

    Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading ("Prospectus") applies since 1 July 2005 (the "Prospectus Directive", available here). The purpose of the Prospectus Directive was to harmonise rules for investor’s protection and for publishing prospectuses specifically concerning the companies that want to raise capital either by listing shares or by offering investment opportunities to the general public. 

    On 30 September 2015, the EU Commission published an action plan on a capital markets union (the "CMU", available here), aiming at achieving a true single market for capital across the 28 EU Member States. Part of this plan is the revision of the rules applying under the Prospectus directive in order to make it less costly for businesses to raise funds publicly, and to simplify the requirements, which were sometimes burdensome in particular for small and medium companies ("SME"). 

    On 30 November 2015, the EU Commission published a proposal for a regulation on Prospectus (COM(2015) 583 final – the "Commission Proposal", available here), which aims to (i) reduce fragmentation in financial markets in order to make it easier for EU businesses to obtain funding, and to (ii) improve protection of investors by giving them shorter, yet detailed and comprehensible information on investment products to help them decide whether or not to invest. 

    On 3 June 2016, the Council of the EU Presidency published its general approach on the Commission Proposal (the "Council Approach", available here). 

    On 16 December 2016, the EU Parliament and the Council of the EU struck a compromise on the Commission Proposal in trilogue (the "Compromise", available here). 

    What's new?

    On 5 April 2017, building on the Compromise, the EU Parliament Plenary adopted the final text of the Prospectus regulation (the "Final Text"). 

    It is to be noted that a correlation table between the Prospectus Directive and the Final Text can now be found in the Annex VI to the Final Text. 

    The Final Text is available here.

    What's next?

    The Prospectus regulation shall enter into force on the twentieth day following that of its publication in the OJEU.

  • CSDR - ESMA issues two sets of guidelines

  • Background

    Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositories ("CSDs") entered into force on 17 September 2014 ("CSDR", available here). It applies since the same date (with the exception of transitional measures application dates). 

    In the CSDR context described above, ESMA considers that there is a need to specify further how the rules and procedures of Article 41 CSDR should be defined by the CSD and implemented in case of default of a participant, and how such rules and procedures should be tested and reviewed. Moreover, ESMA considers that there is a need to specify the conditions under which access by CSDs to the trading feeds of CCPs and trading venues could be refused, especially as this type of access between infrastructures is not covered under Regulation (EU) No 600/2014 ("MIFIR", available here).

    What's new?

    On 23 March 2017, ESMA issued the following final reports on two sets of guidelines under CSDR: (i) the final Report concerning the guidelines on participant default rules and procedures (ESMA70-708036281-8 – the "CSDR Guidelines on participant default rules"), and (ii) the final report concerning the guidelines on access by a CSD to the transaction feeds of a CCP or of a trading venue (ESMA70-708036281-7 – the "CSDR Guidelines on access"). 

    As regards the CSDR Guidelines on participant default rules, ESMA includes the following recommendations on:

    • How the CSD should develop its procedure for establishing participant default rules and procedures, and how the CSD should acknowledge a participant’s default;
    • What type of actions a CSD may take in case of default, and how the CSD should implement them;
    • How a CSD should communicate on the implementation of the default rules and procedures;
    • How a CSD should test and periodically review its default rules and procedures.

    As regards the CSDR Guidelines on access, ESMA specifies (i) the legal, (ii) financial, and (iii) operational risks to be taken into account by a CCP or a trading venue when carrying out a comprehensive risk assessment following a CSD’s access request to their trading feeds. 

    The CSDR Guidelines on participant default rules are available here

    The CSDR Guidelines on access are available here.

    What's next?

    The CSDR Guidelines on participant default rules and the CSDR Guidelines on access will be translated into the EU official languages and published on ESMA website. Those Guidelines will apply two months after the publication of the official translations. 

    Within two months after the publication of the official translations, each national competent authority will have to confirm whether or not it complies with those Guidelines.

  • CSDR - ESMA Q&A update

  • Background

    Regulation (EU) No 909/2014 on improving securities settlement in the EU and on central securities depositories ("CSDs") entered into force on 17 September 2014 ("CSDR", available here). It applies since the same date (with the exception of transitional measures application dates). 

    On 13 March 2017, ESMA released its first set of questions and answers on CSDR (the "Q&A", available here).

    What's new?

    On 31 March 2017, ESMA updated its CSDR Q&A (ESMA70-708036281-2, the "Updated Q&A"). 

    In the Updated Q&A, ESMA highlights the following topics:

    • The introduction of additional national requirements for CSDs;
    • The sharing of CSDs’ staff with another entity of the same group of companies;
    • The actions to be taken by CSDs in order to obtain the Legal Entity Identifier ("LEI") of issuers under Article 29 CSDR;
    • The choice between omnibus client segregation and individual client segregation for all clients (existing and new) under Article 38(5) CSDR;
    • The provision of banking-type ancillary services and the competent authorities involved under Articles 54 and 55 of CSDR. 

    The Updated Q&A is available here.

    What's next?

    ESMA will update the Q&A on a regular basis. 

  • EMIR - ESMA and SRB statements on the recovery and resolution of CCPs

  • Background

    Regulation (EU) 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here). 

    EMIR, directly applicable and enforceable throughout the EU, aims at increasing financial stability and safety by preventing the situation where a collapse of one financial firm can cause the collapse of others. It requires mandatory clearing of certain OTC derivatives. A CCP role is to act as the buyer to every seller and the seller to every buyer for a specified set of contracts. CCPs deal in financial transactions in various asset classes such as in equities, derivatives and repos. However, no EU wide rules are in place for the scenario where CCPs face severe distress or failure and therefore need to be recovered or resolved in an orderly manner. 

    At the international level, the Committee on Payment and Market Infrastructures ("CPMI") and the International Organisation of Securities Commissions ("IOSCO") have developed guidance on recovery plans for financial market infrastructures, including CCPs (available here), while the Financial Stability Board ("FSB") has issued guidance on the application of its key attributes of effective resolution regimes to financial institutions such as CCPs (available here). 

    On 29 April 2016, ESMA published its report on EU-wide CCP Stress test 2015 (ESMA/2016/658, available here). 

    On 28 November 2016, the EU Commission issued its regulation proposal on a framework for the recovery and resolution of all authorised CCPs in the EU in accordance with EMIR (the "Proposal", available here) and its fact sheet, which sets out frequently asked questions on the Proposal (the "FAQ", available here). Directive 2014/59 EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms set out provisions comparable to those in the recovery and resolution rules for banks ("BRRD", available here), however the Proposal contains CCP-specific tools that better align with CCPs’ default management procedures and operating rules. 

    On 20 March 2017, ESMA established five new Memoranda of Understanding ("MoU") with non-EU regulators under EMIR (available here).

    What's new?

    On 22 March 2017, ESMA Chair Steven Maijoor (ESMA71-99-372, the "ESMA Statement") and SRB Chair Elke König (the "SRB Statement") delivered statements on the recovery and resolution of CCPs at the ECON public hearing. 

    ESMA considers the Proposal overall balanced, proportionate and consistent with other existing relevant EU legislation, including EMIR, BRRD, and with current international guidance provided by the CPMI-IOSCO (on recovery) and by the FSB (on resolution). 

    The ESMA Statement focuses on the following three aspects of the Proposal:

    • Recovery planning – In view of facilitating supervisory convergence within the EU and setting a benchmark for third country CCPs, the Proposal could benefit from a more detailed technical outline (e.g. regulatory technical standards or guidelines);
    • Proposed resolution tools – Resolution tools should be considered in the CCP specific context under EMIR and a possibly broad choice of resolution tools in the legislative framework would allow resolution authorities to have the required degree of flexibility;
    • Governance of resolution processes – Lowering the hurdle for ESMA mediation in the Proposal is appropriate considering ESMA’s practical experiences with colleges operating under EMIR. 

    In the SRB Statement, three main areas of the Proposal have been highlighted as follows:

    • Treatment of clearing members – A waiver for certain obligations for clearing members that are already in resolution should be considered (e.g. waivers from taking on additional positions or waivers from meeting additional CCP cash calls for the purpose of absorbing losses);
    • Flexible entry into resolution – Resolution should happen before the end of the CCP’s waterfall, and when there are still enough resources to ensure an orderly resolution;
    • Harmonisation of CCP supervision – Harmonisation should be done through replicating the Banking Union approach, with a single EU supervisor and a single EU resolution authority for the 17 CCPs under the remit of the Proposal. 

    The ESMA Statement is available here

    The SRB Statement is available here

    What's next?

    The Proposal will be submitted to the EU Parliament and the Council of the EU for approval and adoption. 

    The final FSB guidance on CCP resolution is expected to be published by the G20 summit in July 2017.

  • EMIR - Transitional periods for PSAs published in the OJEU

  • Background

    Regulation (EU) 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here). 

    EMIR, directly applicable and enforceable throughout the EU, aims at increasing financial stability and safety by preventing the situation where a collapse of one financial firm can cause the collapse of others. It requires mandatory clearing of certain OTC derivatives through an authorised or a recognised CCPs or apply risk mitigation techniques when they are not centrally cleared. A CCP role is to act as the buyer to every sellers and the seller to every buyers for a specified set of contracts. CCPs accept only highly liquid assets, generally cash, as collateral to meet variation margin calls in order to allow for swift liquidation in the event of default. 

    EMIR hence identifies two categories of counterparties to whom clearing obligation applies i.e. (i) Financial counterparties such as bank, insurers, asset managers and (ii) non-financial counterparties which includes any EU firm whose positions in OTC derivative contracts exceed the EMIR clearing thresholds. Pensions Funds were exempted from central clearing until 15 August 2015. 

    Pension Scheme Arrangements ("PSAs") in many Member States are active participants in the OTC derivatives markets. PSAs generally minimise their cash positions, instead holding higher yielding investments such as securities in order to ensure strong returns for pensioners. Entities operating PSAs minimise their allocation to cash in order to maximise the efficiency and the return for their policy holders. Hence, requiring such entities to clear OTC derivatives contracts centrally would lead to divesting a significant portion of their assets for cash in order for them to meet the ongoing margin requirements. 

    Article 89(1) of EMIR set out a three year cooling down period with regard to the clearing obligation of Article 4 of EMIR for contracts that are objectively measurable as reducing investment risks directly relating to the financial solvency of PSAs. 

    On 3 February 2015, the EU Commission adopted its report assessing the whether necessary efforts have been made by CCPs to develop appropriate technical solutions for the transfer of non-cash collateral by PSAs. Following the findings of the report, the EU Commission extended the three-years transitional period referred in Article 89(1) of EMIR by two additional years. 

    On 21 May 2015, the EU Commission ran a public consultation (available here) on the topic, which closed on 13 August 2015. Since the outcome of such consultation confirmed that the necessary effort to develop appropriate technical solutions had not been made by CCPs at that point in time, the EU Commission came to the conclusion that the three-year transitional period should be further extended. 

    On 20 December 2016, the EU Parliament and the Council of the EU adopted a delegated regulation (EU) 2017/610 amending EMIR (the "Commission Delegated Regulation"). According to Article 1 of the Commission Delegated Regulation, ‘until 16 August 2018, the clearing obligation set out in Article 4 shall not apply to OTC derivative contracts that are objectively measurable as reducing investment risks directly relating to the financial solvency of PSAs as defined in Article 2(10). The transitional period shall also apply to entities established for the purpose of providing compensation to members of PSAs in case of a default.’

    What's new?

    On 31 March 2017, the Commission Delegated Regulation was published in the OJEU. 

    The Commission Delegated Regulation is applicable as from 1 April 2017. 

    The Commission Delegated Regulation as published in the OJEU is available here.

    What's next?

    The clearing obligations will apply to PSAs from 16 August 2018.

  • EMIR - ESMA issues opinion on Commission’s regulation proposal on CCP recovery and resolution

  • Background

    Regulation (EU) 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here). 

    EMIR, directly applicable and enforceable throughout the EU, aims at increasing financial stability and safety by preventing the situation where a collapse of one financial firm can cause the collapse of others. It requires mandatory clearing of certain OTC derivatives. However, no EU wide rules are in place for the scenario where CCPs face severe distress or failure and therefore need to be recovered or resolved in an orderly manner. 

    At the international level, the Committee on Payment and Market Infrastructures ("CPMI") and the International Organisation of Securities Commissions ("IOSCO") have developed guidance on recovery plans for financial market infrastructures, including CCPs (available here), while the Financial Stability Board ("FSB") has issued guidance on the application of its key attributes of effective resolution regimes to financial institutions such as CCPs (available here). 

    On 28 November 2016, the EU Commission issued its regulation proposal on a framework for the recovery and resolution of all authorised CCPs in the EU in accordance with EMIR (the "Regulation Proposal", available here) and its fact sheet, which sets out frequently asked questions on the Regulation Proposal (the "FAQ", available here). Directive 2014/59 EU of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms set out provisions comparable to those in the recovery and resolution rules for banks ("BRRD", available here), however the Regulation Proposal contains CCP-specific tools that better align with CCPs’ default management procedures and operating rules. 

    ESMA has been empowered under Article 34(1) of EMIR to provide an opinion on the Regulation Proposal for EU Regulation on CCP recovery and resolution.

    What's new?

    On 5 April 2017, ESMA provided its opinion on the EU Commission’s Regulation Proposal (ESMA70-151-222 – the "Opinion"). 

    In the Opinion, ESMA highlights mainly the following areas:

    • ESMA considers that the Regulation Proposal is balanced, proportionate and consistent with other existing EU legislation;
    • In particular, ESMA board of supervisors will include CCP resolution authorities as observers and a new ESMA Resolution Committee will be established;
    • ESMA considers that it should be allocated additional resources that would first work on the RTS and Guidelines and then would be assigned to ongoing regulatory tasks;
    • ESMA highlights that the composition of the resolution colleges should reflect the substantial importance of CCPs for the stability of particular countries considering the nature of their operations;
    • Under the Regulation Proposal, ESMA will have a mediation role to facilitate EMIR colleges and resolution colleges reaching a joint opinion on certain recovery and resolution issues or decided thereupon when no opinion is reached within a 4-month deadline; Given the political dimension of this matter, ESMA refrains to advise the co-legislators on any specific arrangements and refers to its experience under EMIR colleges;
    • ESMA considers useful to introduce further detailed requirements on the content of recovery plans to ensure a high level of convergence, while providing the necessary flexibility to CCPs to select the set of recovery tools that better fits its organisational structure and ecosystem;
    • ESMA suggests that some EMIR requirements should not be waived, especially the prudential requirements such as margins or default fund contributions, to avoid putting at risk the resilience of the Bridge CCP and compromise the credibility of its future sell out. 

    The Opinion is available here.

    What's next?

    The Regulation Proposal will be submitted to the EU Parliament and the Council of the EU for approval and adoption. 

    The final FSB guidance on CCP resolution is expected to be published by the G20 summit in July 2017.

  • EMIR - ESMA clarifies CCPs general margining practices

  • Background

    Regulation (EU) 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here). 

    EMIR, directly applicable and enforceable throughout the EU, aims at increasing financial stability and safety by preventing the situation where a collapse of one financial firm can cause the collapse of others. It requires mandatory clearing of certain OTC derivatives. 

    On 19 December 2012, commission delegated regulation was adopted by the EU Parliament and the Council of the EU supplementing EMIR with RTS on requirements for CCPs (the "Delegated Regulation"). 

    Article 27 paragraph 1 of the Delegated Regulation provides that a 'CCP may allow offsets or reductions in the required margin across the financial instruments that it clears if the price risk of one financial instrument or a set of financial instruments is significantly and reliably correlated, or based on equivalent statistical parameter of dependence, with the price risk of other financial instruments.' Moreover, according to the last sentence of paragraph 4: 'Where the CCP is not exposed to any potential risk from the margin reduction, it may apply a reduction of up to 100 % of that difference'. 

    MiFID I provides a definition of 'financial instrument' under section C of its Annex 1. However it does not specify the essential characteristics of each financial instrument within the types listed in this section. Article 2(5) of EMIR defines a derivative as a financial instrument which falls within any of the groups of derivatives set out in points (4) to (10) of Section C of Annex I to MiFID I. Furthermore, Article 2(7) of EMIR defines the term "class of derivatives" as "a subset of derivatives sharing common and essential characteristics including at least the relationship with the underlying asset, the type of underlying asset, and currency of notional amount. Derivatives belonging to the same class may have different maturities". However, there is no further clarification as to which instrument/product can be considered the same. 

    What's new?

    On 10 April 2017, ESMA published an opinion on portfolio margining requirements under Article 27 of the Delegated Regulation (the "Opinion"). 

    In particular, the Opinion aims at clarifying the following:

    • How to identify the same financial instruments or products;
    • The cases where margin reductions can be up to 100%. 

    The Opinion is available here.

    What's next?

    National competent authorities should assess margining requirements in light of the Opinion.    

  • EMIR - ESMA establishes MoU on CCP supervision with regulators of New Zealand

  • Background

    Regulation (EU) 648/2012 dealing with over-the-counter ("OTC") derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here). 

    On 16 December 2016, the EU Commission implementing decision (EU) 2016/2274 on the equivalence of the regulatory framework for CCPs in New Zealand in accordance with Article 25(6) of EMIR was published in the OJEU (the "Decision", available here). 

    Article 25(2)(c) of EMIR requires the establishment of cooperation arrangements as precondition for ESMA to recognise CCPs established in New Zealand to provide clearing services to clearing members or trading venues established in the EU.

    What's new?

    On 18 April 2017, ESMA published the Memorandum of Understanding under EMIR established with the Reserve Bank and Financial Markets Authority of New Zealand (the "MoU"). 

    The purpose of the MoU is two-fold, namely to:

    • Ensure the fulfilment of the condition set out in Article 25 (2)(c) of EMIR;
    • Provide ESMA with adequate tools to monitor the on-going compliance by the covered CCPs with the recognition conditions. 

    The MoU is effective as of 28 February 2017. 

    The MoU is available here.

    What's next?

    ESMA, the Reserve Bank and the Financial Markets Authority of New Zealand intend to periodically review the functioning and effectiveness of cooperation arrangements between them. 

  • MiFID II/MiFIR - ESMA updates its Q&A on CFD and other speculative products

  • Background

    Directive 2014/65/EU as amended by Directive (EU) 2016/1034 ("MiFID II", respectively available here and here ) and Regulation (EU) 600/2014 as amended by Regulation (EU) 2016/1033 ("MiFIR", respectively available here and here) entered into force on 2 July 2014. MiFID II and MiFIR, together with most of the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS"), shall apply as from 3 January 2018. 

    Under Article 6 (3) and 31 of MiFID, investment firms authorised in home member states ("MS") are able to provide any or all of the investment services for which they have received authorisation into other "MS".

    Contracts for difference ("CFDs"), binary options and rolling spot forex allow retail investors looking to enhance their returns, to speculate on the short-term movements in the of financial instruments. 

    MiFID investment firms offering CFDs and other complex products to retail clients often operate an online business model in which investment services are offered on a cross-border basis, in multiple other MS, without the use of branches or tied agents and with firms having only a limited physical presence outside the home MS. 

    What's new?

    On 31 March 2017, ESMA published an update of its Q&A relating to the provision of CFDs and other speculative products to retail investors under MiFID (ESMA35-36-794, the "Q&A"). 

    The Q&A add a new section identifying certain key aspects that NCAs should take into account as part of their supervisory responsibilities relating to the provision of CFDs and other speculative products to retail investors under MiFID outside their home MS without the establishment of a branch or a tied agent. 

    The Q&A is available here.

    What's next?

    ESMA will update its Q&A on a regular basis when new questions are received.

  • MiFID II/MiFIR - ESMA issues draft RTS on consolidated tape for non-equity financial instruments

  • Background

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

    MiFID II introduces the concept of consolidated tape providers ("CTPs"), which collect post-trade information published by trading venues and approved publication arrangements ("APAs"), and consolidate them into a continuous live data stream and make the data available to the public, both for equity and non-equity instruments. 

    ESMA already submitted in September 2015 draft regulatory technical standards ("RTS 13") specifying the scope of the equity tape, that were endorsed by the EU Commission on 2 June 2016 and that were published in the OJEU on 31 March 2017 (available here). 

    Given the higher complexity for establishing and operating a non-equity tape and the fact that the provisions on the non-equity tape (in Article 65(2) of MiFID II) will only apply from September 2019, ESMA decided to deliver the draft RTS specifying the scope of the non-equity tape at a later stage. 

    On 3 October 2016, ESMA published a consultation paper on its draft RTS specifying the scope of the consolidated tape for non-equity financial instruments (ESMA/2016/1422 – the "Consultation Paper", available here). The consultation period ended on 5 December 2016.

    What's new?

    On 31 March 2017, building on the Consultation Paper, ESMA released its final report on the draft RTS specifying the scope of the consolidated tape for non-equity financial instruments (ESMA/2017/70-8792942901-40, the "Final Report"). 

    The draft RTS contained in the Final Report amend RTS 13 by adding a new Article 15a specifying the scope of the non-equity tape. 

    In the Final Report, ESMA specifies notably that:

    • In order to establish a framework that provides commercial incentives for operating a consolidated tape for non-equity instruments, CTPs should be allowed to operate a consolidated tape covering only one or more asset classes;
    • CTPs should ensure that they publish information on transactions covering at least 80 percent of the total volume and number of transactions published by APAs and trading venues per asset class during the assessment period;
    • The coverage ratios shall be assessed by the CTP twice per year based on data from the past 6 months. The assessment period shall start on the first day of the months of January and July. The first assessment period shall cover the first 6 months of the year 2019. 

    The Final Report is available here.

    What's next?

    The draft RTS contained in the Final Report have been submitted to the EU Commission, which has three months to decide whether or not to endorse them.

  • MiFID II/MiFIR - 28 RTS and 1 delegated directive published in the OJEU

  • Background

    Directive 2014/65/EU as amended by Directive (EU) 2016/1034 ("MiFID II", respectively available here and here ) and Regulation (EU) 600/2014 as amended by Regulation (EU) 2016/1033 ("MiFIR", respectively available here and here) entered into force on 2 July 2014. 

    MiFID II and MiFIR, together with most of the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS"), shall apply as from 3 January 2018. MiFID II and MiFIR aim to ensure that significant trading activity take place on regulated platforms. 

    The EU Commission has been finalising the level 2 measures supplementing MiFID II/MiFIR in the form of technical standards since November 2016.

    What's new?

    On 31 March 2017, 28 MiFID II/MiFIR RTS and a delegated directive were published in the Official Journal of the EU (together the "RTS", the "Other RTS" and the "Delegated Directive"). 

    The RTS, the Other RTS and the Delegated Directive are available here.

    What's next?

    The RTS, the Other RTS and the Delegated Directive shall apply as from 3 January 2018.

  • MMFs - Parliament amends the MMF Regulation proposal

  • Background

    Money Market Funds ("MMFs") are an important source of short-term financing for financial institutions, corporations and governments. MMFs hold almost half of short-term debt issued by the banking sector, government and corporations. On the demand side, MMFs are short-term cash management tools that provide high degree of liquidity, diversification, stability of value of the principal invested combined with a market-based yield. MMFs represent a crucial link bringing together demand and offer of short-term money. 

    On 4 September 2013, the EU Commission put forward an initial draft of a MMF regulation (COM(2013) 615 final, available here). After lengthy negotiations, the Council presidency of the EU, the EU Commission and the EU Parliament reached on 14 November 2016 a provisional agreement on the draft regulation (available here). 

    On 7 December 2016, the Committee of Permanent Representatives ("Coreper") approved the legislation final text (available here).

    What's new?

    On 5 April 2017, the EU Parliament adopted the final text of the regulation (the "Regulation"). 

    The Regulation foresees the main following rules for MMFs:

    • All MMFs established, managed or marketed in the EU.
    • MMFs will be set in three category as (i) Variable NAV MMF ("VNAV"), (ii) Public Debt Constant NAV MMF ("Public Debt CNAV" or "CNAV"), (iii) Low Volatility NAV MMF ("LVNAV");
    • Derivatives, other MMFs (capped to 17,5%), securitisation and ABCP are eligible assets (15%) ;
    • Liquidity requirements will differ according to the type of MMF;
    • Liquidity fees and gates will be applicable under certain circumstances on redemptions, redemption gates or suspension of redemptions;
    • Internal credit quality assessment will have to be put in place by MMFs managers and will have to be reviewed annually by the management and the board;
    • At least bi-annual stress testing is required;
    • External support is forbidden;
    • Transparency requirements are imposed on MMFs (Daily and weekly publications on websites and quarterly reportings) ;
    • MMFs managers will have to implement KYC procedures to anticipate the effects of concurrent redemptions requests;
    • Review clause – Five years after the entry into force of the Regulation. 

    The regulation will enter into force 20 days after publication in OJEU (expected early Q2 2017) and will apply 12 months later (Q2 2018). Existing funds (UCITS, AIFs) will be grandfathered for 18 months after entry into force (Q4 2018). 

    The Regulation is available here.

    What's next?

    The final text shall be published shortly in the Official Journal of the EU, which will trigger entry into force 20 days later.

  • PRIIPs - Parliament raises no objections to the Commission delegated regulation

  • Background

    Regulation (EU) No 1286/2014 ("PRIIPs Regulation", available here) entered into force on 29 December 2014. It was supposed to apply from 1 January 2017. 

    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 of the PRIIPs. 

    On 8 March 2017, the EU Commission issued its delegated regulation addressing the concerns and endorsing the amendments (PE587.693v01-00) proposed by the Committee on Economic and Monetary Affairs ("ECON") on 30 August 2016 (C (2017) 1473 final, the "Commission Delegated Regulation", available here). 

    The Commission Delegated Regulation hence takes account of the following:

    • Comprehension alert – PRIIPs manufacturers shall enclose in their KIDs for each underlying investment option such alert, where the PRIIP is not a vanilla product pursuant to Article 30(3) (a) of Directive 2016/97/EU (the "IDD") and Article 25(4)(a) of Directive 2014/65/EU. 
    • Risk categorisation of insurance products - In Article 5, 'What are the cost section', the insurance costs have been deleted and have been bundled into the 'other ongoing costs'. The costs are dealt with in point III of the Annex VI 'List of insurance-based investment products'. The Section 'What is this product' of the KID shall now display all the information linked to insurance benefits and costs. 
    • MOPs - The specific nature of MOPs is now envisaged.  Under Article 14 of the Commission Delegated Regulation, a point 2 has been added that specifies the conditions under which, PRIIPS manufacturers may use the key investor information document ("KIID") prepared under UCITS rules.
    • Performance scenarios - PRIIP manufacturers shall include four appropriate performance scenarios, as set out in Annex V in the section entitled ‘What are the risks and what could I get in return?’ of the KID.

    What's new?

    On 29 March 2017, the EU Parliament issued a recommendation for a decision to raise no objections to the EU Commission Delegated Regulation (The "Recommendation"). 

    The EU Parliament observes that the provisions of the revised Commission Delegated Regulation are consistent with the objectives of the Parliament expressed in its resolution of 14 September 2016.The 24 hour period to oppose to the PRIIPs RTS delegated act in the EU Parliament has passed. 

    The Recommendation is available here.

    What's next?

    Since no objections have been raised following the scrutiny period, the recommendations to raise no objections to the PRIIPs RTS is deemed approved. 

    PRIIPs Regulation and RTS will apply as from 1 January 2018. 

  • PRIIPs – Delegated regulation published in the OJEU

  • Background

    Regulation (EU) No 1286/2014 ("PRIIPs Regulation", available here) entered into force on 29 December 2014. It was supposed to apply from 1 January 2017. 

    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 of the PRIIPs. 

    On 8 March 2017, the EU Commission issued its delegated regulation addressing the concerns and endorsing the amendments (PE587.693v01-00) proposed by the Committee on Economic and Monetary Affairs ("ECON") on 30 August 2016 (C (2017) 1473 final, the "Commission Delegated Regulation", available here). 

    The Commission Delegated Regulation hence takes account of the following:

    • Comprehension alert;
    • Risk categorisation of insurance products;
    • MOPs;
    • Performance scenarios. 

    On 29 March 2017, the EU Parliament issued a recommendation for a decision to raise no objections to the EU Commission Delegated Regulation. 

    What's new?

    On 12 April 2017, the Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing the PRIIPs Regulation was published in the OJEU (the "Delegated Regulation"). 

    The Delegated Regulation is available here.

    What's next?

    The Delegated Regulation shall apply as from 1 January 2018.

  • SFTR/EMIR - ESMA issues final report on technical standards under SFTR and certain amendments to EMIR

  • Background

    Regulation (EU) 2015/2365 on transparency of securities financing transactions ("SFTs") and of reuse applies since 12 January 2016 ("SFTR", available here). SFTR aims at enhancing financial stability by setting out reporting obligations as well as disclosure on these transactions, and on total return swaps in UCITS and AIF’s annual (and semi-annual) reports (Article 13(1)) and prospectuses (Article 14(1)). 

    SFTR also amends Regulation 648/2012 ("EMIR", available here). The definition of SFT in SFTR does not include derivatives contracts as defined under EMIR, but covers liquidity swaps and collateral swaps transactions, which are not categorized as derivatives under EMIR. 

    SFTR provides for reporting of details regarding SFTs concluded by all market participants (financial or non-financial entities), including the composition of collateral (available for re-use or already re-used), the substitution of collateral at the end of the day, and the haircuts applied. 

    On 11 March 2016, ESMA published its discussion paper on draft regulatory technical standards ("RTS") and implementing technical standards ("ITS") under SFTR (ESMA/2016/356 – the "Discussion Paper", available here). 

    On 30 September 2016, ESMA started its consultation on draft RTS and ITS under SFTR and amendments to related EMIR RTS (ESMA/2016/1409 – the "Consultation Paper", available here). The consultation period was closed on 30 November 2016. 

    At the international level, the Financial Stability Board ("FSB") issued on 25 January 2017 a report on 'Non-cash collateral re-use: Measure and Metrics', which aims to obtain a clearer understanding of global collateral re-use activities in securities financing markets (the "FSB Report", available here). 

    What's new?

    On 31 March 2017, ESMA issued its final report on technical standards under SFTR and certain amendments to EMIR (ESMA70-708036281-82 – the "Final Report"). 

    In the Final Report, ESMA sheds light on the following draft RTS/ITS:

    • RTS specifying the details of the application for registration as a trade repository ("TR") under SFTR;
    • Amendments to EMIR RTS specifying the details of the application for registration as a TR;
    • ITS with regard to the format of applications for registration of TRs under SFTR;
    • ITS with regard to the format and frequency of the reports to TRs under SFTR;
    • RTS specifying the details of reports to be reported to TRs under SFTR;
    • RTS specifying the operational standards for data collection by TRs and aggregation, and comparison of data across repositories and the details of aggregate positions to be published and of SFTs to which entities shall have access under SFTR;
    • RTS specifying the details of information to which, and the terms on conditions under which, entities should have access under SFTR;
    • Amendments to EMIR RTS specifying access levels;
    • ITS with regard to the procedures and forms for exchange of information on sanctions, measures and investigations under SFTR. 

    The Final Report is available here.

    What's next?

    The 9 draft technical standards contained in the Final Report have been submitted to the EU Commission, which has three months to decide whether or not to endorse them.

  • UCITS/AIFMD - ESMA publishes final report on notification frameworks

  • Background

    ESMA has identified thematic studies as a means of achieving supervisory convergence across National Competent Authorities ("NCAs"). In 2016, ESMA conducted a thematic study on the operation of home and host responsibilities under the UCITS and AIFM Directives (respectively available here and here), with a view to promoting smooth operation of the EU passports for marketing and management (the "Thematic Study"). 

    The Thematic Study assesses the notification frameworks concerning the following passporting regimes:

    • UCITS management company passport (to establish a branch or pursue activities under the freedom to provide services with or without carrying out collective portfolio management; Articles 16-21 of the UCITS Directive);
    • UCITS marketing passport (to market UCITS in another EU Member State; Articles 91-96 of the UCITS Directive);
    • AIFMD management passport (cross-border management of EU AIFs and/or provision of services referred to in Article 6(4) of AIFMD, with or without establishing a branch; Article 33 of AIFMD);
    • AIFMD marketing passport (to market EU AIFs in another EU Member State; Article 32 of AIFMD). 

    What's new?

    On 7 April 2017, ESMA published its final report on the notification frameworks and home-host responsibilities under UCITS and AIFM Directives (ESMA34-43-340, the "Final Report"). 

    The findings of the Thematic Study form the core of the present report, which are supplemented, where possible, by a number of recommendations on good supervisory practices. 

    As regards the UCITS Directive framework, the following good practices have been identified:

    • The supervision of UCITS management companies ("ManCo") which pursue cross-border activities or carry out cross-border collective portfolio management carried out by NCAs in the home Member State of the ManCo;
    • The supervision of branches set up by ManCo in host Member State and their compliance with the rules of conduct in place in the host Member State;
    • The supervision of compliance of UCITS marketed cross-border with requirements on disclosure of documentation to investors. 

    As regards the AIFMD framework, the following good practices have been identified:

    • The general supervision of cross-border activities carried out by AIFMs;
    • The compliance of branches set up by AIFMs in host Member States with the rules of conduct in place in the host Member State;
    • The supervision of marketing activities pursued by AIFMs on a cross-border basis. 

    The annex I to the Final Report presents statistical data (provided by 31 NCAs) on cross-border activities by ManCo, AIFMs, UCITS and AIFs. AIFM make use of the AIFMD passports to a much lesser extent and in fewer EU Member State, compared to the ManCo (reflecting the lower number of AIFs set up in the EU, the relatively short implementation period of AIFMD, the late transposition of the AIFMD framework in some EU Member States, and the limitations of cross-border marketing to professional investors only). 

    The Final Report is available here.

    What's next?

    NCAs have identified a number of other issues around the notification frameworks which did not form part of the Final Report (e.g. the potential for different interpretation of legislation, risk management of funds operating cross-border, the content of notification document or the submission of payment receipts as part of the initial notification). Further work will be conducted at the level of ESMA to enhance cooperation and supervisory convergence among NCAs on those issues. 

    In this context, ESMA will also assess the possibility to contribute to the CMU action on barriers to cross-border distribution of investment funds carried out by the EU Commission. 

  • UCITS - ESMA Q&A update

  • Background

    ESMA has issued a Q&A document aiming to promote common supervisory approaches and practices in the application of the undertakings for collective investment in transferable securities ("UCITS Directive", available here) and its implementing measures, providing responses to questions posed by the general public and competent authorities in relation to their practical application. 

    The previous version of the ESMA UCITS Q&A was issued on 21 November 2016 (ESMA/2016/1586, available here).

    What's new?

    On 6 April 2017, ESMA issued an updated version of its UCITS Q&A, by inserting a new question 7 entitled 'advance notification of provision of services' under section IV 'notification of UCITS and UCITS management companies; exchange of information between competent authorities' (ESMA34-43-392, the "Updated Q&A"). 

    The Updated Q&A clarifies that, when a UCITS management company wishes to pursue cross-border activities (MiFID services, collective portfolio management of UCITS) by way of the UCITS management company passport, it may notify cross-border activities without having to identify a specific UCITS. 

    When the management company, at a later point in time, has identified a UCITS that it wants to manage on a cross-border basis, it has to notify the competent authorities in the home Member State of the UCITS in accordance with Article 20 of the UCITS Directive. 

    The Updated Q&A  is available here.

    What's next?

    ESMA will update its UCITS Q&A on a regular basis.

  • LUXEMBOURG

    Bill 7024 amended – Data Protection / Depositary Regime

  • Background

    On 16 March 2017, the CNPD released its advice pursuant to Article 32 paragraph (3)(f) of the Law of 2 August 2002 on the protection of persons (the "Data Protection Law") to present to the Chamber of Deputy any suggestion that might simplify and improve the legislative and regulatory framework with regard to the processing of data (the "Advice"). 

    On 29 July 2016, Bill 7024 (the "Bill", available here) was submitted to the Luxembourg’s Chamber of Deputies for adoption. The Bill is an omnibus Bill which will impact various Luxembourg legislation in two ways: firstly, the Bill implements regulation (EU) 2015/751 of 29 April 2015 of the EU Parliament and of the Council of the EU on interchange fees for card-based payment instructions (would be capped to 0,12% against 0,2% initially). 

    The Bill then updates, amends, complements, reformats and sets out errata concerning various Luxembourg laws of the financial sector. 

    Amongst other, the Law of 17 December 2010 as amended and the law of 12 July 2013 on alternative investment fund managers ("AIFMs"). The Bill sets forth the details of the new depositary regime of Part II UCIs. It for instance, specifies the conditions under which, part II UCIs may be exempted from the requirement to comply with the UCITS V depositary regime. 

    Furthermore, the law of 5 April 1993 on the financial sector (the "FSL"), as amended is substantially modified in its Article 41 notably concerning the softening of the obligation of professional secrecy imposed on credit institutions and other professionals of the financial sector. 

    Respectively on 23 November 2016, 13 December 2016 and 22 December 2016, the Luxembourg Chamber of Commerce, the Luxembourg Council of State and the Luxembourg Chambre of salariés published their advices on the Bill. 

    Given the financial hurdles linked to personal data protection issues, the Council of State in its release of 13 December 2016, called for advice the Commission Nationale pour la protection des données (the "CNPD", available here). On 16 March 2017, the CNPD released its advice pursuant to Article 32 paragraph (3)(f) of the Law of 2 August 2002 on the protection of persons (the "Data Protection Law") to present to the Chamber of Deputy any suggestion that might simplify and improve the legislative and regulatory framework with regard to the processing of data (available here).

    What's new?

    On 4 April 2017, the Luxembourgish government addressed its amendments to the Bill (the "Amendments"). 

    The Government mainly amended the Bill in the following ways:

    • Law of 5 April 1993 of the financial sector – A new Article 36-2 has been inserted increasing the organisational requirements in case of outsourcing and sub-delegation imposed on professionals of the financial sector ("PSF") other than investment firms;
    • The outsourcing should be materialised through a service agreement and shall safeguard the level of quality of the service provided;
    • Credit institutions and investment firms shall be solely responsible for the fulfilments of their prudential obligations under the relevant regulation;
    • "Cascade" outsourcing shall be accepted by the entity established in Luxembourg and under the supervision of the CSSF or the European Central Bank ("ECB"), initiating the outsourcing;
    • The outsourcing of the main operational functions to a third party, shall not impair the quality of the internal controls of the outsourcing entities;
    • The professional secrecy would not be opposable to entities that operate under the supervision of the CSSF, the ECB, or the Commissariat aux assurances.

    The Amendments are available here.

    What's next?

    The Luxembourg’s Chamber of Deputies shall adopt the Bill in the forthcoming months.

  • 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 General Counsel
    Chantal Slim, Compliance and Regulatory Watch Manager (France)

    Permanent Editorial Committee
    Gaëlle Kerboeuf, Group General Counsel, Head of Legal Group
    Chantal Slim, Compliance and Regulatory Watch Manager (France)
    Eliane Meziani-Landez, Head of Legal (France)
    Emilie Zaracki, Legal Officer (France)
    Eliane Jacquet, Compliance Officer (France)
    Ana Vazquez, Head of Legal (Luxembourg)
    Véronique Bastin, Head of Compliance (Luxembourg)
    Stefan Ullrich, Head of Legal (Germany)
    Costanza Bucci, Legal and Compliance Manager (Italy)
    Mireille Mol, Legal and Compliance Manager (Netherlands)
    Charles du Maisnil, Head of Legal - Risk & Compliance (CACEIS Belgium)
    Helen Martin, Head of Legal (Ireland)
    Samuel Zemp, Head of Legal and Compliance (CACEIS Bank Luxembourg - Swiss Branch)
    Sandra Czich, Head of Legal and Compliance (CACEIS Switzerland)
    Corinne Brand, Marketing and Communication Specialist (France)
    Arianna Arzeni, Head of Group Business Development Support
    Malgorzata Journo, Legal Officer (France)

    Design
    Sylvie Revest-Debeuré, CACEIS, Communications

    Photos credit
    Yves Maisonneuve, Yves Collinet, CACEIS, Fotolia

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