SCANNING – December 2016

European Regulatory Watch Newsletter

Summary

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.

According to Articles 24 and 42 of the AIFMD, a non-EU AIFM, which is allowed to market AIFs to professional investors in EU Member States without a passport, shall regularly report to the national competent authorities ("NCAs") of the EU Member States where the AIFs are marketed.

On 1 October 2013, ESMA published its opinion on the collection of information for the effective monitoring of systemic risk under Article 24(5) of the AIFMD (ESMA/2013/1340, the "Opinion", available here).

The previous ESMA AIFMD Q&A update was issued on 6 November 2016.

What's new?

On 16 December 2016, ESMA published an updated version of its AIFMD Q&A as regards reporting to NCAs (ESMA/2016/1669, the "Updated Q&A").

ESMA specifies that when a non-EU AIFM reports information to the NCA of an EU Member State under Article 42 of AIFMD, only the AIFs marketed in that EU Member State have to be taken into account for the purpose of the reporting.

When EU Member States apply the Opinion, (non-EU) AIFMs should also report information on non-EU master AIFs not marketed in the EU that have either EU feeder AIFs or non-EU feeder AIFs marketed in the EU under Article 42 of the AIFMD. Non-EU AIFMs should also report information on the EU master AIF not marketed in the EU.

The Updated Q&A is available here.

What's next?

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

 

CMU initiatives - EU Commission follows up on the call for evidence on the EU regulatory framework for financial services

Background

On 30 September 2015, the EU Commission published its Action plan on building a Capital Markets Union ("CMU", available here). The CMU is a way to fulfil the free movement of capital, which is a long-standing objective of the EU and shall allow the creation of a true single market for capital for all 28 Member States. It sets out a programme of 33 measures, focused on 6 objectives, which aim to establish the building blocks of an integrated capital market in the EU by 2019.

On the same date, the EU Commission published a call for evidence on the EU Regulatory Framework for financial services in order to assess the overall coherence of the existing framework regarding the different regulations, which were adopted over the past years ("the Call for Evidence", available here).

As a reminder, the EU Commission was looking for empirical evidence and concrete feedback on:

  • Rules affecting the ability of the economy to finance itself and grow;
  • Unnecessary regulatory hurdles on financing the economy;
  • Interactions, inconsistencies and gaps;
  • Rules giving rise to unintended consequences.
The Call for Evidence also includes assessing the interaction between the individual rules and their combined economic impact. As such, it should ensure that unintended consequences, inconsistencies and gaps in the current regulatory framework are addressed.

What's new?

On 23 November 2016, the EU Commission issued a communication to the EU Parliament, the Council of the EU, the EU economic and social committee and the committee of the regions on the Call for evidence (the "Communication").

The Communication highlighting how the feedbacks received have been integrated into existing review and legislative proposals also identifies a number of other issues, which might require follow-up action as briefly described below:

  • Reducing unnecessary regulatory constraints on financing the economy
    • CRR2 - As part of addressing these issues, the EU Commission has also published the CRR2 package to support banks’ ability to finance the wider economy.
    • SME Financing - The CRR2 package extends the SME supporting factor to all SME loans. Moreover, the EU Commission will assess the implementation of MiFID II investment research concerning SMEs. Lastly, the EU Commission will carefully observe that MAR as applied to the SME growth market issuers’ regime does not create an imbalance between supporting SMEs to list and protecting investors.
    • Long-term financing - As an incentive for insurers to invest in long-term investment, the EU Commission adopted lower risk charges for insurers under Solvency II for qualifying infrastructure projects and in the CRR2 package, the credit risk capital requirements for banks’ investments in infrastructure projects shall be reduced. Furthermore, the EU Commission will assess the appropriateness of the prudential treatment of private equity and privately placed debt.
    • Market liquidity - The EU Commission will assess the functioning of markets in repurchase agreements. To address specific concerns around bond market liquidity, the EU Commission proposed that the new pre-trade transparency regime for MiFID II be phased in for non-equity instruments in order to cover only the most liquid instruments initially. Moreover, as part of CSDR level 2, the EU Commission has already introduces rules for less liquid instruments through cash penalties and settlement discipline.
    • EMIR review - The access to clearing will be assessed as part of the EMIR review.
  • Enhancing the proportionality of rules without compromising prudential objectives
    The EMIR review will play a big part in enhancing proportionality as part of adjusting the scope of EMIR clearing and margin requirements.
    • Banking - The EU Commission proposes to provide for different disclosure requirements for small and non-complex credit institutions and to remove unnecessary complexity in the treatment of trading book market risk and counterparty credit risk.
    • Insurance - The EU Commission has issued a call for technical advice addressed to the European Insurance Occupational Pension Authority ("EIOPA") for the review in the Solvency II Delegated regulation of 17 specific items to simplify methods, assumptions and calculations of certain modules and develop framework for use of alternative credit assessment.
    • Asset Management - The AIFMD and the UCITS regime shall be reviewed by the EU Commission for instance to align remuneration regimes and reduce reporting burdens.
    • Credit Rating Agencies ("CRA") - The EU Commission is planning or assessing to which extent can small CRA disapply from the CRA regulation in application of the principle of proportionality with a view of enhancing competition.
    • Reducing undue regulatory burdens - The EU Commission will assess the reporting requirements through the CRR2 package and EMIR review in 2017. EIOPA shall report on the implementation of proportionate reporting requirements for small insurers by the end of 2016. The EU Commission has also launched the financial data standardisation project.
    • Public disclosure requirements - The EU Commission is currently assessing the Transparency and Accounting Directive national transposition measures.
    • Compliance costs - The EU Commission will review the national options in the Audit Regulation (cross-border impact of mandatory rotation and black-list of prohibited services) launched a mapping exercise of national transposition measures to identify gold-plating provisions and the work of the EU Commission’s Expert Group on barriers to free movement of capital is ongoing.
    • Reducing barriers to entry and market integration - The EU Commission will continue to monitor the situation on the CRA market. It will also assess the results from the cross-border barriers to fund management consultation and intends to explore the feasibility of simplifying the range of authorisations needed to provide these services across the single market.
  • Making the regulatory framework more consistent and forward-looking
    • Addressing interactions and inconsistencies - The EU Commission shall adjust the leverage ratio in the CRR2 package to allow bank to offset the potential future exposure of the relevant derivative transaction with initial margin. It will focus on the inconsistencies between Solvency II and CRR regarding the treatment of regional governments and local authorities as well as UCITS restrictions as regards the use of OTC derivatives.
    • Enhancing investor and consumer protection - The Green paper Action plan, planned for early 2017, will set out steps in creating a deeper single market.
    • Regulatory framework - The EU Commission will also address gaps in regulatory framework especially concerning CCPs and review of macro-prudential framework as well as taking into consideration the technological developments through its Fintech task force.
 The Communication is available here.

What's next?

The EU Commission will monitor progress in the implementation of the measures outlined above and will publish its findings and next steps before the end of 2017.

 

Directive on access to beneficial owners information – Publication in the OJEU

Background

Directive 2014/107/EU (the "CRS Directive", available here) relates to the mandatory automatic exchange of information in the field of taxation. It requires the identification of the person listed or identified as the holder of a financial account by a financial institution. When an intermediary is holding an account for a person, other than a financial institution, the beneficial owner of the account is considered as the account holder for the purpose of the CRS Directive. The CRS Directive amends Directive 2011/16/EU on administrative cooperation in the fields of taxation and is applicable since 1 January 2016.

Furthermore, Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing entered into force on 26 June 2015 (the "4AMLD", available here). Articles 13, 30 and 31 of 4AMLD mainly deal with the identification rules of beneficial owners, while Article 40 focuses on record-keeping duties for Member States. 4AMLD will apply as of 26 June 2017 across Europe.

Based on a EU Commission proposal, on 6 December 2016, the Economic and Financial Affairs Council (the "Ecofin") adopted Council Directive (EU) 2016/2258 allowing tax authorities to have access to information on beneficial ownership held by authorities responsible for the prevention of money laundering (the "Directive on access to beneficial owners’ information" is available here). Indeed, Member States shall provide by law for access by tax authorities to the mechanisms, procedures, documents and information referred to in articles 13, 30, 31 and 40 of 4AMLD.

What's new?

On 16 December 2016, the Directive on access to beneficial owners’ information was published in the OJEU.

The Directive on access to beneficial owners’ information is available here.

What's next?

The Directive on access to beneficial owners’ information will apply as from 1 January 2018 onwards.

 

EMIR - EU Commission issues its regulation proposal on a framework for 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.

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 proposed rules contains CCP-specific tools that better align with CCPs’ default management procedures and operating rules.

What's new?

On 28 November 2016, the EU Commission issued a regulation proposal on a framework for the recovery and resolution of all authorised CCPs in the EU in accordance with EMIR (the "Proposal") and a fact sheet which sets out frequently asked questions on the Proposal (the "FAQ").

The two main objectives of the Proposal are:

  • To seek the orderly recovery of CCPs in various scenarios of financial distress through the implementation of robust and comprehensive recovery plans, agreed between the CCP and its clearing members; and
  • If this were to be insufficient and the conditions for resolutions were to be met, to allow authorities to take swift action in order to safeguard financial stability, secure the continuity of the CCP’s critical functions, and protect tax payers to the maximum extent.

The Proposal contains mostly specific provisions with regard to:

  • The set-up of resolution authorities and resolution college - Each EU Member State shall appoint one or more resolution authorities that are empowered to use the resolution tools and exercise the resolutions powers as set out in the Proposal. The resolution authorities shall be national central banks, competent ministries, public administrative authorities or other authorities entrusted with public administrative powers. CCPs’ resolution authorities are required to set up and chair resolution colleges for each CCP.
  • The preparation of recovery plans - CCPs are required to prepare recovery plans to overcome any form of financial distress which would exceed their default management resources and other requirements under EMIR. This should include scenarios involving defaults by clearing members of the CCP as well as the materialisation of other risks and losses (e.g. frauds or cyberattack). Recovery plans are to be reviewed by the competent authority of the CCP.
  • The preparation of resolution plans and resolvability assessments - Resolution authorities are required to prepare resolution plans for how CCPs would be restructured and their critical functions kept alive in the event of their failure. Resolution authorities should also assess the overall resolvability of the CCP and address any impediments thereto.
  • The early intervention - Competent authorities are granted specific powers to intervene in the operations of CCPs where their viability is at risk but before they reach the point of failure or where their actions may be detrimental for overall financial stability. The CCP could be notably required to undertake specific actions in its recovery plan, or to refrain from taking such action.
  • The resolution triggers - A CCP should be placed in resolution when it is failing or likely to fail, when no private sector alternative can avert failure, and when its failure would jeopardise the public interest and financial stability. The resolution authority would assess whether all conditions are met. A CCP could also be placed into resolution even if not all of these conditions are met, where the application of further recovery by the CCP could prevent its failure but could compromise financial stability in the process.
  • The resolution tools and powers - The main resolution tools that could be used separately or in conjunction are (i) the sale of a CCP’s entire or critical functions to a viable competitor, (ii) the creation of a publicly controlled bridge CCP and (iii) the allocation of losses and positions among clearing members. The Proposal does not mandate which tools and powers to use in different scenarios but leaves the choice to the resolution authority, depending on the circumstances but where practicable in line with the resolution plan agreed by the resolution college.
  • The cooperation amongst countries - Authorities in different jurisdictions should cooperate in resolution cases, to recognise and enforce each other’s resolution actions. In order to improve the enforceability of an EU authority’s action on clearing members located in third countries, CCPs would be required to ensure that the actions in their recovery plans are binding across jurisdictions. Beyond this, resolution authorities should enter into cooperation arrangements with authorities in third countries.
  • The amendments of EMIR and ESMA Regulation - EMIR will be amended to introduce the possibility for a clearing obligation to be temporarily suspended in the context of resolution of a CCP where necessary to preserve financial stability. ESMA would be required to set up an ESMA Resolution Committee for the purpose of the Proposal.

The Proposal is available here.

The FAQ 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.

 

EMIR - Extension of the transitional periods for CCPs in relation with own funds requirements

Background

Regulation (EU) 648/2012 dealing with over-the-counter derivatives, central counterparties ("CCPs") and trade repositories applies since 16 August 2012 ("EMIR", available here).
In order to avoid disruption to international financial markets and to prevent penalising institutions by subjecting them to higher own funds requirements during the processes of authorisation and recognition of existing CCPs, Article 497(1) and (2) of Regulation (EU) 575/2013 established a transitional period during which all CCPs with which institutions established in the Union clear transactions may be considered qualifying CCPs by institutions ("CRR", available here).

CRR amended EMIR in respect of certain inputs to the calculation of institutions' own funds requirements for exposures to CCPs. Accordingly, Article 89(5a) of EMIR requires certain CCPs to report, for a limited period of time, the total amount of initial margin they have received from their clearing members. That transitional period mirrors the one laid down in Article 497 of the CRR. Both transitional periods were initially set to expire on 15 June 2014. Those transitional periods have been extended until 15 December 2016 by notably EU Commission Implementing Regulation (EU) 2016/892 to avoid disruption to markets outside the Union (available here).

The authorization process for existing CCPs established in the Union has been completed, so no further extensions of the transitional period are necessary for those CCPs. However, as the recognition process with regard to CCPs established in third countries that have applied for recognition will not be completed by 15 December 2016, a further extension of the transitional periods should enable institutions established in the Union (or their subsidiaries established outside the Union) to delay the application of the provision to increase significantly their own funds.

What's new?

On 10 December 2016, the EU Commission Implementing Regulation (EU) 2016/2227 on the extension of the transitional periods related to own fund requirements for exposures to CCPs was published in the OJEU (the "Regulation 2016/2227").

The transitional periods referred to in Article 497(2) of the CRR and in the second subparagraph of Article 89(5a) of EMIR are respectively extended by an additional sixth months until 15 June 2017.

The Regulation 2016/2227 is available here.

What's next?

The Regulation 2016/2227 entered into force on 13 December 2016.

 

EMIR - Delegated Regulation on risk-mitigation techniques for OTC derivatives contracts not cleared by a CCP 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. Article 4 of EMIR, requires mandatory clearing of certain OTC derivatives.

According to Article 11(3) of EMIR, financial counterparties shall have in place risk-management procedures requiring the timely, accurate and appropriately segregated exchange of collateral covering OTC derivative contracts entered on or after 16 August 2012. Pursuant to the same Article, non-financial counterparties that are above the clearing threshold to use risk-mitigation techniques for non-centrally cleared OTC derivatives transactions.

On 8 March 2016, the European Supervisory Authorities ("ESAs") submitted to the EU Commission the final draft regulatory technical standards ("RTS") on the risk-mitigation techniques for OTC-derivative contracts not cleared by a CCP (available here).

On 28 July 2016, the EU Commission sent a letter to the ESAs informing them of its intention to endorse with amendments the final draft RTS and submitted to the ESAs a modified version of the RTS.

The ESAs had until mid-September 2016 to amend the draft RTS based on the EU Commission’s proposed amendments and resubmit it to the EU Commission in the form of an opinion.

On 9 September 2016, the ESAs published an opinion addressed to the EU Commission rejecting some of the proposed amendments to the final draft RTS.

On 4 October 2016, the EU Commission issued the amended delegated regulation laying out the final version of the RTS.

What's new?

On 15 December 2016, the EU Commission delegated regulation (EU) 2016/2251 of 4 October 2016, supplementing EMIR with regard to RTS for risk-mitigation techniques for OTC derivative contracts not cleared by a CCP, was published in the OJEU (the "Delegated Regulation").

As regards initial margin, the requirements of the Delegated Regulation are likely to have a measurable impact on market liquidity, as assets provided as collateral cannot be liquidated or otherwise reused for the duration of the non-centrally cleared OTC derivative contract. Such requirements represent a significant change in market practice and present certain operational and practical challenges.

Units or share of UCITS will constitute eligible collateral, to the extent that the UCITS invests in assets considered as eligible collateral under Article 4(1) of the Delegated Regulation (such a cash, certain debt securities, corporate bond or equities included in a recognised index). If a UCITS invests also in other assets, only the portion of the value of its units or shares invested into eligible assets will be considered as an eligible collateral.

The Delegated Regulation is available here.

What's next?

The Delegated Regulation will enter into force on 4 January 2017.

The Delegated Regulation is directly applicable in all Member State.

 

EMIR - ESMA consults on extended aggregated trade repository data

Background

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

According to Article 81(5) of EMIR, ESMA was required to develop draft regulatory technical standards ("RTS") specifying the frequency and the details of the information to be made available to the relevant authorities and the information to be published as well as operational standards required in order to aggregate and compare data across repositories and for the relevant authorities to have access to information as necessary.

ESMA submitted those RTS to the EU Commission in September 2012, which became the EU Commission Delegated Regulation (EU) 151/2013 of 19 December 2012 ("Delegated Regulation 151/2013", available here).

On 19 September 2014, the Financial Stability Board published its "Feasibility study on approaches to aggregate OTC derivatives data" (available here).

Public data has experienced several problems related to the comparison and aggregation of data across TRs. Therefore, ESMA is setting out several proposals to enhance the data made publicly available by TRs and to increase the transparency to the public in general as well as allowing the publication of certain figures required by MiFID II (available here) and the Benchmarks Regulation (available here).

What's new?

On 15 December 2016, ESMA published its consultation paper with regard to draft technical standards on data to be made publicly available by TRs under Article 81 of EMIR (ESMA/2016/1661, the "Consultation Paper").

The Consultation Paper presents the proposals related to the publication of data by trade repositories and in particular for the avoidance of double counting of cleared derivatives, on the details of aggregations for commodity derivatives and derivatives using benchmarks, and more generally the main technical aspects of publication of aggregate data.

The Annex III of the Consultation Paper contains the text of the draft RTS which shall amend the Delegated Regulation 151/2013.

The Consultation Paper is available here.

What's next?

ESMA will consider all comments to the Consultation Paper received by 15 February 2017.

ESMA will then prepare a final report to be submitted to the EU Commission for its endorsement.

 

MiFID II/MiFIR - Level 2 implementation state of play

Background

Directive 2014/65/EU ("MiFID II", available here) and Regulation (EU) 600/2014 ("MiFIR", available here) entered into force on 2 July 2014.

The EU Commission is currently finalizing level 2 measures supplementing MiFID II/MiFIR in the form of technical standards.

What's new?

#

Topic

Status

Link

RTS 1 with annex

Transparency requirements for trading venues and investment firms in respect of shares, depositary receipts, exchange-traded funds, certificates and other similar financial instruments and on transaction execution obligations in respect of certain shares on a trading venue or by a systematic internaliser

Published by the EU Commission

Respectively available here and here

RTS 2 with annex

Transparency requirements for trading venues and investment firms in respect of bonds, structured finance products, emission allowances and derivatives

Published by the EU Commission

Respectively available here and here

RTS 3 with annex

Volume cap mechanism and the provision of information for the
purposes of transparency and other calculations

Published by the EU Commission

Respectively available here and here

RTS 4

Criteria for determining whether derivatives subject to the clearing obligation should be subject to the trading obligation

Published in the OJEU

Available here

RTS 5

Direct, substantial and foreseeable effect of derivative contracts within
the Union and the prevention of the evasion of rules and obligations

Published by the EU Commission

Available here

RTS 6 with annex

Requirements of investment firms engaged in algorithmic trading

Published by the EU Commission

Respectively available here and here

RTS 7 with annex

Organisational requirements of trading venues

Published by the EU Commission

Respectively available here and here

RTS 8

Requirements on market making agreements and schemes

Published by the EU Commission

Available here

RTS 9 with annex

Ratio of unexecuted orders to transactions in order to prevent disorderly trading conditions

Published by the EU Commission

Respectively available here and here

RTS 10

Requirements to ensure fair and non-discriminatory co-location services and fee structures

Published by the EU Commission

Available here

RTS 11 with annex

Tick size regime for shares, depositary receipts and exchange traded funds

Published by the EU Commission

Respectively available here and here

RTS 12

Determination of a material market in terms of liquidity in relation to notifications of a
temporary halt in trading

Published by the EU Commission

Available here

RTS 13

Authorization, organisational
requirements and the publication of transactions for data reporting services providers

Published by the EU Commission

Available here

RTS 14

Specification of the offering
of pre-and post-trade data and the level of disaggregation of data

Published by the EU Commission

Available here

RTS 15 with annex

Clearing access in respect of trading venues and central counterparties

Published by the EU Commission

Respectively available here and here

RTS 16

Access in respect of benchmarks

Published in the OJEU

Available here

RTS 17

Admission of financial instruments
to trading on regulated markets

Published by the EU Commission

Available here

RTS 18

Suspension and removal of
financial instruments from trading

Published by the EU Commission

Available here

ITS 19

Content and format of the description of the functioning of multilateral trading facilities and organised trading facilities and the notification to the European Securities and Markets Authority

Published in the OJEU

Available here

RTS 20

Criteria to establish when an activity is considered to be ancillary to the main business

Published by the EU Commission Available here

RTS 21 Application of position limits to commodity derivatives Published by the EU Commission Available here

RTS 22 with annex

Reporting of transactions to competent authorities

Published by the EU Commission

Respectively available here and here

RTS 23 with annex

Data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority and competent authorities

Published by the EU Commission

Respectively available here and here

RTS 24 with annex

Maintenance of relevant data relating to orders in financial instruments

Published by the EU Commission

Respectively available here and here

RTS 25 with annex

Level of accuracy of business clocks

Published by the EU Commission

Respectively available here and here

RTS 26

Obligation to clear derivatives traded on regulated markets and timing of acceptance for clearing

Published by the EU Commission

Available here

RTS 27 with annex

Data to be provided by execution
venues on the quality of execution transactions

Published by the EU Commission

Respectively available here and here

RTS 28 with annex

Annual publication by investment
firms of information on the identity of execution venues and on the quality of execution

Published by the EU Commission

Respectively available here and here

Other RTS

Information for registration of third country firms and format of information to be provided to the clients

Published in the OJEU

Available here

Other RTS

Information and requirements for the authorisation of investment firms

Published by the EU Commission

Available here

Other RTS

Information to be notified by investment firms, market operators and credit institutions

Published by the EU Commission

Available here

Other RTS

Exchange of information between competent authorities when cooperating in supervisory activities, on-the-spot verifications and investigations

Published by the EU Commission

Available here

 

What's next?

The MiFID II and MiFIR framework will apply across the EU from 3 January 2018.

 

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

Background

Directive 2014/65/EU ("MiFID II", available here) and Regulation (EU) 600/2014 ("MiFIR", available here) entered into force on 2 July 2014. MiFID II and MiFIR, together with the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS") will be applicable as from 3 January 2018.

ESMA issues Q&A documents aiming to promote common supervisory approaches and practices in the application of MiFID II and MiFIR in relation to market structure topics and providing responses to questions posed by the public, market participants and competent authorities in relation to the practical application of MiFID II and MiFIR.

The first ESMA Q&A on in investor protection topics under MiFID II and MiFIR was dated 10 October 2016 (ESMA/2016/1444).

What's new?

On 16 December 2016, ESMA published an updated version of the Q&A on MiFID II and MiFIR investor protection topics (ESMA/2016/1444, the Updated Q&A).

The Updated Q&A refers mostly to underwriting and placing, inducement (research), post-sale reporting and information on costs and charges as follows:

  • Underwriting and placing – The questions refer to the allocation policy, the record of allocations and the obligation relating to advice on corporate;
  • Inducement (research) – The questions refer to the legal status of money, dealing with unrequested research provided free of charge, research from third-country providers, research provided from another group entity and clarification of what constitutes a minor non-monetary benefit;
  • Post-sale reporting – The questions include reporting the overall value with automated systems that do not provide adequate valuations;
  • Information on costs and charges – The questions include making the personalised costs of the funds, graphical display of cumulative effect of the costs on the return and providing ex-post information on total costs.

The Updated 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 updates its Q&A on market structures topics

Background

Directive 2014/65/EU ("MiFID II", available here) and Regulation (EU) 600/2014 ("MiFIR", available here) entered into force on 2 July 2014. MiFID II and MiFIR, together with the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS") will be applicable from 3 January 2018.
According to Article 4(1)(39) of MiFID II, algorithmic trading means trading in financial instruments where a computer algorithm automatically determines individual parameters of orders such as whether to initiate the order, the timing, price or quantity of the order or how to manage the order after its submission, with limited or no human intervention, and does not include any system that is only used for the purpose of routing orders to one or more trading venues or for the processing of orders involving no determination of any trading parameters or for the confirmation of orders or the post-trade processing of executed transactions.
On 25 April 2016, the EU Commission published its delegated regulation 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", available here). In accordance with Article 18 of the Delegated Regulation, a system shall be considered as having no or limited human intervention where, for any order or quote generation process or any process to optimise order-execution, an automated system makes decisions at any of the stages of initiating, generating, routing or executing orders or quotes according to pre-determined parameters.
As set out in Recital 8 of the RTS on the tick size regime for shares, depositary receipts and exchange traded funds ("RTS 11", available here), the tick size regime only determines the minimum difference between two price levels of orders sent in relation to a financial instrument in the order-book.

The previous Q&A update on market structures topics is dated 18 November 2016 (ESMA/2016/1583). See our 3W-Flashnews RW-2016-825 for further information.

What's new?

On 19 December 2016, ESMA published an updated version of its Q&A on MiFID II and MiFIR market structure topics, including a new section on the Direct Electronic Access ("DEA") and algorithmic trading (ESMA/2016/1583, the "Updated Q&A").
As regards algorithmic trading (Article 18 of the Delegated Regulation), the Updated Q&A clarifies the following topics:

  • A simple algorithm qualifies as algorithmic trading - The fact that a person of firm undertakes trading activity by means of an algorithm which includes a small number of processes (e.g. makes quotes that replicate the prices made by a trading venue) does not disqualify the firm running such algorithm from being engaged in algorithmic trading;
  • The transmission of an order for execution by an investment firm to another investment firm without performing any algorithmic trading activity is not algorithmic trading;
  • Automated Order Router ("AOR") and algorithmic trading - In case the same unmodified order (including modifying the size of the order by "slicing" it into "child" orders) is sent to several trading venues to ensure execution and it is executed in one of these venues, the functionality can also cancel the unexecuted orders in the other venues without qualifying as algorithmic trading.

As regards tick size regime (RTS 11), the Updated Q&A highlights the following:

  • Application of the minimum tick size regime under Article 49 of MiFID II to orders for which a pre-transparency waiver can be granted pursuant to article 4 of MiFIR:
    • As the aim of the minimum tick size regime is to ensure the orderly functioning of the market, its application extends to all orders submitted to trading venues. The application of the tick size regime would include, for example, limit orders resting on an order book, including orders held in an order management system as per Article 4(1)(d) of MiFIR;
    • However, since the tick size regime applies to orders and not to the execution price of transactions, it is therefore possible for a transaction to take place at a price between two ticks. This is the case if this price is derived from other prices that otherwise comply with the minimum tick size. For example, the minimum tick size regime would not apply to transactions executed in systems that match orders on the basis of a reference price as per Article 4(1)(a) of MiFIR, or to negotiated transactions as per Article 4(1)(b) of MiFIR.
  • Treatment of orders remaining on the book by trading venues at the moment the minimum tick size increases:
    • Trading venues have discretion to set those rules, including whether or not such orders are to be cancelled or amended;
    • Trading venues are responsible to disclose those rules appropriately;
    • Trading venues must also observe the requirement to enforce the minimum tick size for orders submitted after that tick size comes into force.
The Updated Q&A is available here.

What's next?

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

 

MiFID II/MiFIR - ESMA publishes its first Q&A on commodity derivatives topics

Background

Directive 2014/65/EU ("MiFID II", available here) and Regulation (EU) 600/2014 ("MiFIR", available here) entered into force on 2 July 2014. MiFID II and MiFIR, together with the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS") will be applicable from 3 January 2018.
According to Article 57 of MiFID II, EU Member States shall ensure that competent authorities, in line with the methodology for calculation determined by ESMA, establish and apply position limits on the size of a net position which a person can hold at all times in commodity derivatives traded on trading venues and economically equivalent OTC contracts. On 1 December 2016, the EU Commission published its RTS for the application of position limits to commodity derivatives ("RTS 21", available here).
Article 2 of MiFID II introduces a quantitative test for non-financial firms which trade in commodity derivatives to determine whether their speculative trading activities, i.e. their "ancillary activities", are of a size that they should be authorised as a financial firm. Non-financial firms which are below the thresholds set out in the underlying RTS for the criteria to establish when an activity is considered to be ancillary to the main business ("RTS 20", available here) are exempt from being authorised under MiFID II.

ESMA issues Q&A document aiming to promote common supervisory approaches and practices in the application of MiFID II/MiFIR in relation to the position limits, position reporting and ancillary activity provisions and other aspects of the commodity derivatives regime in MiFID II. It provides responses to questions posed by the general public, market participants and competent authorities in relation to the practical application of MiFID II/MiFIR.

What's new?

On 19 December 2016, ESMA published its first Q&A on MiFID II and MiFIR commodity derivatives topics (ESMA/2016/1673).
The Q&A clarifies a number of points relating to the position limits and ancillary activities requirements.

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 Q&A on MiFIR data reporting

Background

The Regulation (EU) 600/2014 ("MiFIR", available here) entered into force on 2 July 2014 and will be applicable from 3 January 2018.

MiFIR is in particular expanding the MIFID I post-trade transparency regime. In this context, investment firms are required to report the details of transactions in financial instruments which are traded on a trading venue or financial instruments where the underlying is a financial instrument traded on a trading venue.

The annex to the MIFIR RTS 24 is setting forth the details to be reported by investment firms (available here).

What's new?

On 20 December 2016, ESMA issued a Q&A on MiFIR data reporting (ESMA/2016/1680 - the Q&A").

The Q&A set forth some rules on how to populate the reporting fields related to the LEI of an issuer and the date of request for admission to trading or the date of admission to trading of a trading venue.

What's next?

ESMA will update the QA on a regular basis when new questions are received.

 

MMF - Council of the EU confirms agreement with the EU Parliament

Background

On 19 March 2012, to address vulnerabilities that were unveiled following the 2008 crisis, the EU Commission published a green paper on taking action on shadow banking to avoid new sources of risk to accumulate in the financial sector (available here).

On 4 September 2013, as a first step of its roadmap to tackle the risks inherent in shadow banking, the EU Commission adopted a communication on shadow banking and proposed new rules for money market funds ("MMFs", available here). The proposal for a regulation on MMFs aims to ensure that MMFs can better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability (available here).

MMFs are an important source of short-term financing for financial institutions, corporates and governments.

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 draft regulation (available here).

Currently there are two kind of MMFs available: 

  • Variable net asset value ("VNAV MMFs") whose units value depends on market fluctuations;
  • Constant net asset value ("CNAV MMFs") which aim at offering share purchases and redemptions for a fixed price.

What's new?

On 7 December 2016, the Committee of permanent representatives (the "Coreper") approved, on behalf of the Council of the EU, an agreement with the EU Parliament on MMFs (the "Agreement").

The Agreement introduces a new category of MMFs: the Low Volatility NAV MMFs (also called "LVNAV MMFs"). The Agreement also covers the following areas:

  • Liquidity and diversification requirements;
  • Assets in which MMFs can invest, including the role of government debt;
  • Transparency provisions;
  • A review clause for government CNAVs.
The press release on the Agreement is available here.

What's next?

The regulation on MMFs is expected to be approved by the EU Parliament at first reading. It will then be submitted to the Council of the EU for adoption.

 

PRIIPs - EU Parliament and Council of the EU vote for level 1 delay

Background

Regulation (EU) 1286/2014 entered into force on 29 December 2014 ("PRIIPs Regulation", available here).

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

On 6 April 2016, the European Banking Authority ("EBA"), the European Occupational Pensions Authority ("EIOPA") and the European Securities and Markets Authority ("ESMA") jointly submitted to the EU Commission a proposal for the draft RTS on KID for PRIIPs.

On 30 June 2016, the EU Commission endorsed the draft RTS by adopting the EU Commission delegated Regulation (the "CDR", available here).

On 14 September 2016, the EU Parliament issued a motion for a resolution ("MFR") expressing concerns about (1) the removal of credit risk from the calculation of risk categorization of insurance products, (2) the treatment of multi-option products ("MOP") which should be clarified especially regarding the exemption granted to UCITS funds under the PRIIPS Regulation (3) the remaining flaws in the methodology for the calculation of future performance scenarios and (4) the lack of detailed guidance in the CDR on the comprehension alert (the "Motion").

On 9 November 2016, the EU Commission issued a press release indicating the extension by one year of the entry into application of the PRIIPs Regulation.

On 14 November 2016, the EU Commission sent a letter to the ESAs setting out the amendments to be made to the PRIIPs RTS in order to address the concerns expressed by the EU Parliament in the Motion (available here).

On 16 November 2016, the ECON Committee published a draft report on the PRIIPs Regulation as regards the date of its application (the "Draft Report" available here).

On 29 November 2016, the ECON Committee issued the report A8-0356/2016 (the "Report", available here) setting out the EU Parliament draft legislative resolution on the proposal for a regulation to amend the PRIIPs regulation as regards the date of its application (the "Draft Legislative Resolution"). The draft regulation is annexed to the Draft Legislative Resolution (the "Draft Regulation").

What's new?

On 1 December 2016 and on 8 December 2016, the EU Parliament and the Council respectively voted to delay the application date of the PRIIPs Regulation.

The press release as regards the EU Parliament’s position is available here.

The Regulation is available here.

What's next?

The PRIIPs Regulation shall now apply as from 1 January 2018.

 

Prospectus directive - EU Commission, EU Parliament and Council of the EU agree on new prospectus rules

Background

On 31 December 2003, directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading entered into force ("Prospectus Directive", available here). The Prospectus Directive aims to harmonise rules for investor’s protection and for publishing prospectuses specifically concerning the companies which wanted 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, aiming at achieving a true single market for capital across the 28 EU Member States (the "CMU", available here). An important part of the CMU is the revision of the rules governing the initial disclosure requirements for a public offer or an admission on a regulated market in order to make it less costly for businesses to raise funds publicly, and to simplify the requirements, which were frequently costly and burdensome in particular for small and medium companies ("SMEs").

On 30 November 2015, the EU Commission issued a proposal for a regulation repealing the Prospectus Directive (available here).

On 8 June 2016, the permanent representatives committee ("Coreper") agreed on behalf of the Council of the EU a negotiating stance on new rules on prospectuses to be published when offering securities to the public (available here).

What's new?

On 8 December 2016, the EU Parliament, the Council of the EU and the EU Commission agreed on a new set of prospectus rules to give companies easier access to capital markets (the "Agreed Text").

The main changes provided by the Agreed Text are as follows:

  • Capital raisings and crowdfunding projects up to EUR 1 million will be exempt from issuing a prospectus;
  • EU prospectus will be mandatory from EUR 8 million (previously EUR 5 million) in capital raised - below that threshold, issuers can raise capital according to local market rules issued by growth market;
  • A new EU growth prospectus will be available for SMEs, mid-caps admitted to an SME growth market or small issuances by non-listed companies; Start-ups and SMEs will be able to raise up to 1 million on local growth markets without producing a prospectus;
  • An alleviated corporate bond prospectus will be available for admission to wholesale debt markets;
  • A frequent issuer regime will be available which will halve approval times from 10 to 5 days;
  • Issuers already admitted to stock markets and SME growth markets will benefit from a shorter prospectus for secondary issuances;
  • Prospectus summaries will become shorter and the language used will be easier to understand for investors;
  • Paper prospectuses will only be required if a potential investor explicitly requests one;
  • ESMA will operate free of charge a new EU online prospectus database.

The press release on the Agreed Text is available here.

The Agreed Text is available here.

What's next?

The Agreed Text will be transmitted to the EU Parliament and the Council of the EU for a vote at first hearing.

 

Prospectus Directive – ESMA Q&A update

Background

Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies applies since 3 August 2009 ("SRD I", available here).

SRD I aims at tackling shortcomings of shareholders rights to enable shareholders, regardless of their residence in the EU, to exercise their voting rights. It shall also strengthen and encourage transparent, active and long term shareholders engagement in listed EU companies.

On 9 April 2014, the EU Commission proposed a draft proposal to the EU Parliament and Council of the EU, to strengthen shareholder engagement by amending SRD1, introducing a "say on pay" for EU largest companies. The proposal for a shareholder rights directive II ("SRD II") is available here.

On 8 July 2015, the Legal affair committee of the EU Parliament has adopted the draft legislation in a view to enhance the transparency between remuneration policies and improve shareholder engagement in listed companies.

What's new?

On 9 December 2016, the EU committee of permanent representatives ("Coreper") endorsed the agreement reached between the Council of the EU and the EU Parliament representatives on the SRD II proposal (the "SRD II Proposal"). On 16 December 2016, this agreement was formally approved by the Coreper.

The requirements when adopted will mainly apply as below mentioned:

  • Oversight over director’s remuneration referred to as well as "shareholder say on director’s pay" - The new rules require that the remuneration policy is aligned with the overall business strategy, long-term interests and sustainability of the company and shall not encourage short-term objectives.
  • Identification of shareholders - The new rules will ensure that companies are able to identify and obtain information on their shareholders throughout the intermediary chain with a view of easing the exercise of shareholders’ rights and engagement in the company.
  • Facilitation of shareholders’ rights - Intermediary will be required to deliver to shareholders in a standardised manner and in a timely manner, all company information enabling them to appropriately exercise their rights.
  • Transparency for institutional investors, asset managers and proxy advisors - Institutional investors and asset managers will have to comply with the new rules and publicly disclose their engagement policy or explain why they have chosen no to do so.
  • Related party transactions - In order to provide adequate protection for the interests of the company, material related party transactions should be submitted for approval by the shareholders or the administrative body.

The SRD II Proposal is not available at the time this news is being published.

The press release to the SRD II Proposal is available here.

What's next?

Following the final adoption by the Council of the EU and the EU Parliament next year, the revised SRD I will be published in the OJEU. Member States will have up to two years to incorporate the new provisions into domestic laws.

 

SRD II - Council of the EU agrees with EU Parliament

Background

Directive 2007/36/EC on the exercise of certain rights of shareholders in listed companies applies since 3 August 2009 ("SRD I", available here).

SRD I aims at tackling shortcomings of shareholders rights to enable shareholders, regardless of their residence in the EU, to exercise their voting rights. It shall also strengthen and encourage transparent, active and long term shareholders engagement in listed EU companies.

On 9 April 2014, the EU Commission proposed a draft proposal to the EU Parliament and Council of the EU, to strengthen shareholder engagement by amending SRD1, introducing a "say on pay" for EU largest companies. The proposal for a shareholder rights directive II ("SRD II") is available here.

On 8 July 2015, the Legal affair committee of the EU Parliament has adopted the draft legislation in a view to enhance the transparency between remuneration policies and improve shareholder engagement in listed companies.

What's new?

On 9 December 2016, the EU committee of permanent representatives ("Coreper") endorsed the agreement reached between the Council of the EU and the EU Parliament representatives on the SRD II proposal (the "SRD II Proposal"). On 16 December 2016, this agreement was formally approved by the Coreper.

The requirements when adopted will mainly apply as below mentioned:

Following the final adoption by the Council of the EU and the EU Parliament next year, the revised SRD I will be published in the OJEU. Member States will have up to two years to incorporate the new provisions into domestic laws
  • Oversight over director’s remuneration referred to as well as "shareholder say on director’s pay" - The new rules require that the remuneration policy is aligned with the overall business strategy, long-term interests and sustainability of the company and shall not encourage short-term objectives.
  • Identification of shareholders - The new rules will ensure that companies are able to identify and obtain information on their shareholders throughout the intermediary chain with a view of easing the exercise of shareholders’ rights and engagement in the company.
  • Facilitation of shareholders’ rights - Intermediary will be required to deliver to shareholders in a standardised manner and in a timely manner, all company information enabling them to appropriately exercise their rights.
  • Transparency for institutional investors, asset managers and proxy advisors - Institutional investors and asset managers will have to comply with the new rules and publicly disclose their engagement policy or explain why they have chosen not to do so.
  • Related party transactions - In order to provide adequate protection for the interests of the company, material related party transactions should be submitted for approval by the shareholders or the administrative body.
  • The SRD II Proposal is not available at the time this news is being published.

    The press release to the SRD II Proposal is available here.

    What's next?

    Following the final adoption by the Council of the EU and the EU Parliament next year, the revised SRD I will be published in the OJEU. Member States will have up to two years to incorporate the new provisions into domestic laws.

     

    MAR - ESMA Q&A update

    Background

    Regulation (EU) 596/2014 ("MAR", available here) and Directive 2014/57 EU on criminal sanctions ("CS MAD", available here) apply since 3 July 2016.

    MAR aims at enhancing market integrity and investor protection, strengthens and updates the existing MAD framework.

    ESMA last updated its Q&A relating to MAR on 27 October 2016 (ESMA/2016/1520, available here).

    What's new?

    On 20 December 2016, ESMA issued an updated version of its MAR (the “updated Q&A”, ESMA 2016/1644). The update includes a number of new detailed answers on (i) provisions regarding manager transactions triggering MAR’s notification obligation and on (ii) requirements concerning the handling of investment recommendations.

    The updated Q&A is available here.

    What's next?

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

     

    SFTR- ESMA consults on fees for trade repositories

    Background

    On 23 December 2015, the Regulation 2015/2365 on reporting and transparency of securities financing transactions was published on OJEU ("SFTR" available here). It applies since 12 January 2016.

    SFTR aims at enhancing transparency of securities financing transactions ("SFT") markets and the financial system. Under the SFTR framework, SFTs details can be efficiently reported to trade repositories (TRs). In order to minimize additional operational costs for market participants, the SFTR should build on pre-existing infrastructures, operational processes and formats introduced with regard to reporting derivative contracts to TRs. The SFTR framework should, to the extent possible, be the same as that of regulation N0 648/2012 of 4 July 2012 on OTC derivatives, central counterparties ("EMIR") in respect of the reporting of derivative contracts to TRs. This should also allow TRs registered or recognised under EMIR to fulfill the repository function assigned by the SFTR, provided that they comply with certain additional criteria.

    SFTR like EMIR grant registration and supervisory powers over TRs. In accordance with article 11(1) of SFTR, ESMA shall charge fees to TRs and those fees shall fully cover ESMA’s necessary expenditure relating to the registration, recognition and supervision of trade repositories.

    On 15 January 2016, ESMA received a formal request from the EU Commission to provide technical advice to assist the EU Commission in formulating an EU Regulation on fees for trade TRs under SFTR by delegated act.

    What's new?

    On 19 December 2016, ESMA published a consultation paper (ESMA/2016/1672) on ESMA technical advice to the commission on fees for TRs under SFTR and certain amendments to the fees under EMIR (the "Consultation Paper").

    The Consultation Paper is available here.

    What's next?

    ESMA will consider the feedback to this consultation until 31 January 2017.

     

    UCITS - ESMA Q&A on investments limits

    Background

    ESMA has issued and regularly updates 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 Directives") 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 ESMA UCITS Q&A was issued on 12 October 2016 (ESMA/2016/1455, available here).

    What's new?

    ESMA has issued and regularly updates 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 Directives") 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 ESMA UCITS Q&A was issued on 12 October 2016 (ESMA/2016/1455, available here).
    On 21 November 2016, ESMA published an updated version of its Q&A on the application of the UCITS Directive (ESMA/2016/1586, the "Updated Q&A").

    The Updated Q&A clarifies that a UCITS investing in an UCITS or a collective investment undertaking ("CIU") which is an umbrella fund, should apply the limits set out under Article 56(2) (c) and under Article 55(1) of the UCITS Directive at the level of the individual sub-fund in the target UCITS or target CIU in order to be compliant with the risk spreading requirement principle imposed on UCITS.

    Management companies and Investment Companies not currently doing so, must at their earliest convenience adjust the funds’ portfolios in consequence, acting in due care skill and diligence and taking into account the best interest of the UCITS they manage.
    The Updated Q&A is available here.

    What's next?

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

    LUXEMBOURG

    MiFID II/MiFIR - CSSF communicates additional information on transactions reporting

    Background

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

    According to Article 26 of MiFIR, investment firms which execute transactions in financial instruments shall report complete and accurate details of such transactions to the competent authority as quickly as possible.

    Article 26(9) of MiFIR empowers ESMA to develop draft regulatory technical standards ("RTS"). ESMA hence adopted RTS 22 not yet published in the OJEU for the reporting of transaction amongst other (available here).

    ESMA also published on 10 October 2016 guidelines on transaction reporting, order record keeping and clock synchronization (ESMA/2016/1452, the "Guidelines", available here).

    On 26 October 2016, ESMA published its technical reporting instructions on MiFIR transaction reporting (ESMA/2016/1521, the "Technical Reporting Instructions", available here).

    What's new?

    On 13 December 2016, the CSSF issued a press release to provide additional information on reporting process under Article 26 of MiFIR as follows (the "Press Release"):

    • Adherence to the Guidelines and the Technical reporting instructions - The CSSF will adhere to the Guidelines and the Technical Reporting Instructions and implement them through the publication of a circular;
    • File transport - The method of transmission of transaction reports (as under MiFID I) will remain unchanged;
    • Transition period - In order to ensure a smooth transition from the MiFID I regime to the new MiFID II/MiFIR regime, the CSSF will operate both the new and the old transaction reporting systems in parallel until 31 January 2018. The old system will reject any transaction report referring to a trading date after 2 January 2018. After 31 January 2018, only the MIFID II/MiFIR system will continue to operate;
    • Transaction reporting by branches - As regards transaction reporting by branches laid down in Article 14 of RTS 22, the CSSF will transmit such transaction reports via the transaction reporting exchange mechanism ("TREM") to the competent authorities of the Member States where the involved branches are established. The CSSF would like to clarify that it does not intend to derogate from this standard procedure.
    The Press Release is available here.

    What's next?

    For all further details that require national coordination, the CSSF will provide further guidance as soon as possible.

    TAX UPDATES

    EU - EU Commission announces start of work to create first common EU list of "non-cooperative tax jurisdictions"

    Background

    In January 2016, the EU Commission launched a three-step process for establishing the common EU list as part of its broader agenda to curb tax evasion and avoidance. The aim is to publish the definitive list of non-cooperative jurisdictions by the end of 2017. EU Member States have already given their backing to this approach, which is also strongly supported by the EU Parliament.

    According to the EU Commission, the common EU list is intended as a "last resort" option. It will be a tool to deal with third countries that refuse to respect tax good governance principles, when all other attempts by the EU to engage with these countries have failed.

    What's new?

    On 15 September 2016, the EU Commission announced further actions aimed at creating a common EU list of non-cooperative tax jurisdictions by presenting a pre-assessment ("scoreboard of indicators") of all third (non-EU) countries according to key indicators. EU Member States will need to decide which countries would require a deeper assessment over the next months.

    The aim of the EU Commission’s scoreboard is to help EU Member States to determine which countries the EU should start a dialogue with regarding tax good governance issues. According to the EU Commission, the pre-assessment "has been devised to get the ball rolling and help inform EU Member States’ choices when deciding which countries they should begin screening." However, it should be noted that it will be the Code of Conduct Group which will decide on the relevant jurisdictions to screen, a decision which should be endorsed by the EU-28 Finance Ministers before the end of 2016 according to the EU Commission’s planning.

    The EU Commission’s scoreboard is available here.

    What's next?

    The screening of the selected countries should begin in January 2017, with a view to having a first EU list of non-cooperative tax jurisdictions before the end of 2017.

     

    Luxembourg - Australia’s institutional investors get easier access to Luxembourg UCITS

    Background

    As a rule, a foreign financial services provider ("FFSP") needs to hold an Australian financial services ("AFS") license to provide financial services in Australia, unless relief is granted.

    The Australian Securities and Investments Commission ("ASIC") can exempt a FFSP from this requirement on the twofold condition that the financial services are provided to wholesale (institutional) clients only and that these financial services are regulated by an overseas regulatory authority.

    What's new?

    On 5 December 2016, the Association of the Luxembourg Fund Industry ("ALFI") issued a press release indicating that it had successfully negotiated an AFS licence relief for FFSP regulated by CSSF.

    The AFS licensing relief applies to Chapter 15 Management Companies and Self-Managed SICAVs regulated by the CSSF.

    This AFS licensing relief entered into force on 16 November 2016.

    The press release is available here.

    What's next?

    The AFS licensing relief ceases to apply on 28 September 2018.

     

    Audit - CSSF communicates on requirements applicable to listed investment funds

    Background

    In December 2013, the EU Commission, the EU Parliament and Council of Ministers reached a political agreement on draft legislation to reform the audit market within the EU.
    The main legislative texts governing statutory audit in the EU are (i) the Directive 2014/56/EU on statutory audits of annual accounts and consolidated accounts (the "Directive") and (ii) the Regulation 537/2014 on specific requirements regarding statutory audit of public interest entities (the "Regulation"). Both texts entered into force on 16 June 2014 and are applicable in EU member states since 17 June 2016.
    On 28 July 2016, the Law of 23 July 2016 (the "Law" available here) repealing the previous law of 18 December 2009 (the "Repealed Law") on the audit profession as amended and the grand-ducal regulation (the "Grand-Ducal Regulation" available here), were published in the Memorial A.
    Based on the Law, specific requirements are applicable for public interest entity ("PIE").
    The Law also provides for specific additional provisions regarding the statutory audit of a PIE, which should be read in conjunction with the Regulation but also determines the scope of a PIE.

    A PIE refers to (a) entities whose securities are listed on a EU regulated market, (b) credit institution as defined in article 1(12) of the law on the financial sector as amended and (c) insurance undertakings. Investment funds listed on an EU regulated market will therefore be considered as PIE.

    What's new?

    On 16 December 2016, the CSSF issued a press release 16/45 reminding the additional requirements applicable to investment funds qualifying as PIE (the "Press Release").
    An investment fund is qualified as a PIE if the units of the investment fund are admitted for trading on an EU regulated market as defined under point 14 of article 4(1) of MiFID.
    In its FAQ dated 24 August 2016, the CSSF had already addressed requirements applicable to PIEs such as mandatory audit firm rotation, provision of non-audit services, extended audit report and audit committee rules.
    In the Press Release, the CSSF reminds the additional requirements applicable to PIE’s and their "Réviseur d’Entreprises agréé" as follows:

    • Completion of an engagement quality control before providing the audit report as required under article 8 of the PIE Regulation;
    • Internal Rotation of the key audit partner responsible for carrying the audit as required under article 17 of the PIE Regulation;
    • Inclusion in the transparency report of PIE’s;
    The Press Release is available here.

    What's next?

    These requirements are applicable for periods beginning on or after 17 June 2016.

     

    OECD/G20 BEPS project - The "Multilateral Instrument" is published

    Background

    The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to "disappear" or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually, or the equivalent of 4-10% of global corporate income tax revenues.

    Over 100 countries and jurisdictions are currently working in the Inclusive Framework on BEPS to implement BEPS measures in their domestic legislation and treaties. The sheer number of bilateral treaties makes updates to the treaty network on a bilateral basis burdensome and time-consuming.

    What's new?

    On 24 November 2016, the OECD published the 49-page "Multilateral Convention to Implement Tax Treaty Related Measures to prevent BEPS" (the "Convention").

    The Convention is the formal result of the OECD's efforts to produce a "multilateral instrument", to enable the significant changes to double tax treaties needed to implement the BEPS Project to be made much more swiftly and effectively than would occur through the normal process of bilateral treaty negotiation.

    The main changes affecting the double tax treaties that were recommended by the OECD/G20 BEPS Project concerned tax treaty abuse (action 6) and permanent establishments (Action 7). These measures are covered fully in the Convention, as are all the other treaty wording recommendations made by the BEPS Project.

    The Convention contains no wording that deals with the specific situation of investment funds. No measures follow the OECD's recommendations, made prior to the BEPS Project and endorsed in the Action 6 Final Report, that treaties should be revised to include provisions that deal explicitly with the types of funds that the OECD identify as Collective Investment Vehicles ("CIVs"). Nor has there been any response within the drafting of the Convention to the public consultation undertaken by the OECD in the spring of 2016 on the treatment of alternative investment funds ("non-CIVs") in the context of the BEPS Project's anti-treaty shopping measures.

    The Convention is available here.

    What's next?

    At this stage, there are no clear indications from the Luxembourg Government as to when, or indeed how, Luxembourg will respond to the call for signature of the Convention.

    Notable changes to the global double tax treaty network would probably begin to take effect in 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 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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    This publication is provided by CACEIS from sources believed to be reliable. The present publication is not intended as an offer to sell or a commercial solicitation and may be amended at any time by CACEIS. Information contained in the present newsletter are not a substitute to legal, taxation or investment consultation or advice from an appropriately qualified professional. CACEIS does not warrant the accuracy and completeness of this newsletter, nor endorse or make any interpretation about its content. In no event will CACEIS be liable for any damages whatsoever arising out of the use of, or reliance on the content of this newsletter. Unauthorized used or distribution without the prior written permission of CACEIS is prohibited.