SCANNING DECEMBER 2018

European Regulatory Watch Newsletter


Summary

EUROPE

From above
BMR - ESMA updates its Q&As

  • Background

    The Regulation (EU) 2016/1011 of the European Parliament and of the Council of the EU on indices used as benchmark in financial instruments and financial contracts applies since 1 January 2018 (the "BMR", available here). The BMR is relevant for any investment fund that uses any benchmark to assess its performance, to define asset allocation of its portfolio, or to compute its performance fees.

    The European Commission has adopted delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the BMR (the "BMR Implementing and Delegated Acts", available here).

    The general public, financial market participants, competent authorities and other stakeholders can submit to the European Securities and Markets Authority (the "ESMA") questions on the practical day-to-day application of the BMR requirements. The ESMA provides answers to these questions by publishing updates to its dedicated questions and answers document (ESMA70-145-11 — the "Q&A Document", available here).

    On 7 November 2018, the ESMA published version 10 of the Q&A Document including a new Q&A in its Part 5 on definitions (Q&A 5.11 on page 15), in which the ESMA provided a clarification that the reference to an index in a bilateral agreement on the interest to be paid on exchanged collateral under various OTC derivatives does not amount to "use of a benchmark"

    What's new?

    On 18 December 2018, the ESMA updated version 10 of the Q&A Document (ESMA70-145-11– the "Updated Q&A Document").

    The Updated Q&A Document includes 2 new Q&As on methodology and input data: 

    • Q&A 5.12 (on page 16) clarifies that the methodology of a benchmark can include factors that are not input data. It also describes an essential distinction between the factors embedded in the methodology and input data, stating that these factors should not measure the underlying market or economic reality that the benchmark intends to measure, but should instead be elements that improve the reliability and representativeness of the benchmark. Q&A 5.12 also explains that factors that are not considered input data are relevant elements of the methodology and it is important that such factors comply with the requirements of Article 12 of the BMR on methodology (for instance, benchmark being robust and reliable, clear rules on the exercise of any discretion, traceability and verifiability of the benchmark etc.) on an ongoing basis.
    • Q&A 5.13 (on page 17) refers to Article 3(1)(24) of the BMR, which defines a regulated-data benchmark as a benchmark determined by the application of a formula from specific input data. Q&A 5.13 clarifies that regulated-data benchmarks cannot include input data that are not covered by this definition. However, it also states that the methodology of a regulated-data benchmark can include factors that are not covered by Article 3(1)(24) of the BMR only if those factors are not considered input data, i.e. they do not measure the underlying market or economic reality that the benchmark intends to measure, but instead are elements that improve the reliability and representativeness of the benchmark.

    The Updated Q&A Document is available here.

    What's next?

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

  • CSDR/EMIR/Brexit - Commission Equivalent Decisions about UK CCPs and UK CSDs to mitigate disruption of central clearing

  • Background

    On 13 November 2018, the European Commission (the "Commission") issued a communication entitled "Preparing for the withdrawal of the UK from the EU on 30 March 2019: a Contingency Action Plan" (COM(2018) 880 final – the "Contingency Action Plan", available here). In the Contingency Action Plan, the Commission detailed the limited number of contingency measures to mitigate significant disruption in certain policy areas, e.g. in relation to cleared derivatives, as of the date of the UK withdrawal from the EU (with or without a withdrawal agreement providing a transition period).

    On 23 November 2018, the ESMA published its statement entitled "Managing risks of a no-deal Brexit in the area of central clearing" (ESMA70-151-1948 – the "Public Statement 1", available here). In the Public Statement 1, the ESMA highlighted that it was engaging with the Commission to plan, as far as possible, the preparatory actions for the recognition process of UK central counterparties ("CCPs"), in case of a no-deal scenario.

    On 19 December 2018, after a thorough examination of the risks linked to a "no-deal" Brexit scenario in the EU financial sector, the Commission published the following 4 draft texts:

    • A temporary and conditional equivalence decision for a fixed, limited period of 12 months to ensure that there would be no immediate disruption in the central clearing of derivatives (C(2018) 9139 final – the "Equivalence Decision on UK CCPs", available here);
    • A temporary and conditional equivalence decision for a fixed, limited period of 24 months to ensure that there would be no disruption in central depositaries services for EU operators currently using UK operators (C(2018) 9138 final – the "Equivalence Decision on UK CSDs", available here);
    • 2 Commission draft delegated regulations facilitating novation, for a fixed period of 12 months, of certain OTC derivatives contracts, where a contract is transferred from a UK to an EU27 counterparty, namely:
      • Commission delegated regulation amending Commission Delegated Regulation (EU) 2015/2205, Commission Delegated Regulation (EU) 2016/592 and Commission Delegated Regulation (EU) 2016/1178 supplementing EMIR as regards the date at which the clearing obligation takes effect for certain types of contracts (C(2018) 9122 final – the "RTS on clearing", available here); and
      • Commission delegated regulation amending Delegated Regulation (EU) 2016/2251 supplementing EMIR as regards the date until which counterparties may continue to apply their risk-management procedures for certain OTC derivative contracts not cleared by a CCP (C(2018) 9118 final – the "RTS on margins", available here).

    More information on the above-mentioned draft texts are available here and here.

    On 19 December 2018, the ESMA published the following 2 statements:

    • A statement entitled the "ESMA is ready to review UK CCPs’ and CSDs’ recognition applications for a no-deal Brexit scenario" (ESMA70-151-2032 – the "Public Statement 2", available here). In the Public Statement 2, the ESMA announces that it aims to recognise UK CCPs in a timely manner, where the four recognition conditions under Article 25 of EMIR are met (i.e. (i) the adoption of an equivalence decision, (ii) the CCPs are authorised in the UK and are subject to effective supervision and enforcement ensuring full compliance with the prudential requirements applicable therein, (iii) the establishment of cooperation arrangements between the ESMA and the Bank of England, (iv) the UK is not on the list of third-country jurisdictions which have strategic deficiencies in their anti-money laundering and countering the financing of terrorism regimes ("high-risk third countries")); and
    • A statement, in which the ESMA reminds investment firms and credit institutions providing investment services of their MiFID obligations on disclosure of information to clients in the Brexit context (ESMA35-43-1328 – the "MiFID Reminder", available here).

    What's new?

    On 20 December 2018, the Equivalence Decision on UK CCPs and the Equivalence Decision on UK CSDs were published in the Official Journal of the EU, respectively as follows:

    • The Commission Implementing Decision (EU) 2018/2031 of 19 December 2018 determining, for a limited period of time, that the regulatory framework applicable to CCPs in the United Kingdom of Great Britain and Northern Ireland is equivalent, in accordance with EMIR (the "Decision 2018/2031", available here); and
    • The Commission Implementing Decision (EU) 2018/2030 of 19 December 2018 determining, for a limited period of time, that the regulatory framework applicable to CSDs of the United Kingdom of Great Britain and Northern Ireland is equivalent in accordance with CSDR (the "Decision 2018/2030", available here).

    On the same date, the Luxembourg CSSF issued a communiqué entitled "Communication with regards to EMIR reporting" (the "Communiqué", available here). In particular, the CSSF invites market participants (e.g. financial counterparties, non-financial counterparties) to contact their trade repository ("TR") to verify whether continuity of service will be ensured after the UK withdrawal date. Besides, the CSSF recommends to prepare for the potential outcome that counterparties may need to request their existing UK TR to port their data to an EU27 TR. Therefore, the CSSF encourages counterparties established in Luxembourg to ensure that they and their reporting entities, wherever they are located, fully adhere to the most recent reporting requirements (i) to better enable any potential transfer of data due to the UK’s withdrawal, and (ii) to ensure their continuous compliance with the EMIR reporting obligation.

    What's next?

    Decision 2018/2031 and Decision 2018/2030 entered into force on 21 December 2018.

    Both the Decision 2018/2031 and the Decision 2018/2030 shall apply from the date following that on which the Treaties cease to apply to and in the United Kingdom pursuant to Article 50(3) of the Treaty on European Union (available here).

    However, both the Decision 2018/2031 and the Decision 2018/2030 shall not apply in any of the following cases:

    • A withdrawal agreement concluded with the United Kingdom of Great Britain and Northern Ireland in accordance with Article 50(2) of the Treaty on European Union has entered into force by that date;
    • A decision has been taken to extend the two-year period referred to in Article 50(3) of the Treaty on European Union.

    The Decision 2018/2031 shall expire on 30 March 2020, whereas the Decision 2018/2030 shall expire on 30 March 2021.

  • EMIR / Brexit - ESAs proposes amendments to bilateral margin requirements to facilitate the novation of certain OTC derivative contracts from UK counterparties to EU counterparties

  • Background

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

    With regards to bilateral margining, EMIR Level 1 and Level 2 framework creates the following main categories of requirements, depending on the date of conclusion (or novation) of the relevant non-centrally cleared OTC derivative contract:

    • For contracts concluded before 16 August 2012, no requirement applies;
    • For contracts concluded between 16 August 2012 and the relevant dates of application set out in Articles 36 to 38 of the Commission delegated regulation (EU) No 2016/2251 ("RTS on Bilateral Margining", available here), parties shall continue to apply the risk-management procedures they had in place, which, in some instances, may require no exchange of collateral; and
    • For contracts concluded after the dates referred to in Articles 36 to 38 of the RTS on Bilateral Margining, parties shall apply the risk-management procedures for the exchange of variation and initial margins set out in the RTS on Bilateral Margining.

    If, due to the withdrawal from the EU of the United Kingdom, in which one of the counterparties is established, the parties decide to novate their "legacy contracts" from that counterparty to a new counterparty established in the EU, the novation of the contracts will trigger the requirements for the bilateral margin procedures and the related margining requirements referred to in Article 36 to 38 of the RTS on Bilateral Margining. Given that these shortcomings are a direct consequence of the Brexit, an event that is beyond the control of the parties, and that this may put the EU counterparties facing UK counterparties at a disadvantage compared to EU counterparties facing other EU counterparties, the European Supervisory Authorities (the "ESAs") consider that it is relevant to maintain a level playing field and are proposing amendments to the RTS on Bilateral Margining.

    On 8 November 2018, the ESMA published its final report on the draft regulatory technical standards on the novation of contracts for which the clearing obligation has not yet taken effect (ESMA70-151-1854 – the "Final Report on Clearing", available here).

    What's new?

    On 29 November 2018, to complement the Final Report on Clearing, the ESAs issued its final report entitled "EMIR RTS on the novation of bilateral contracts not subject to bilateral margins" (ESAs 2018 25 – the "Final Report on Bilateral Margining").

    In the Brexit context, the ESAs propose to amend Article 35 of the RTS on Bilateral Margining ("Transitional provisions") in order to facilitate the novation of certain OTC derivative contracts to EU counterparties during a specific time-window, as follows:

    • The proposed exemption would only apply to the novation to a new EU counterparty, which would not trigger the bilateral margin procedures and the related margining requirements, and would not extend to "other life-cycle events" performed by the parties in relation to such contract; and
    • The proposed time-window would last until 12 months after the date of application of the final amending Commission delegated regulation, in order to allow for the repapering.

    The Annex III (from page 13 to 16) contains the revised version of Article 35 of the RTS on Bilateral Margining.

    The Final Report on Bilateral Margining is available here. 

    What's next?

    The ESAs has sent the draft RTS presented in Annex III to the European Commission for endorsement. Such draft RTS are then subject to the scrutiny of the European Parliament and of the Council of the EU.

    Noteworthy is that the final RTS in the form of a Commission delegated regulation shall not apply if any of the following conditions is fulfilled:

    • A withdrawal agreement concluded with the UK in accordance with Article 50(2) of the Treaty on European Union (available here) applies; or
    • A decision has been taken to extend the period referred to in Article 50(3) of the Treaty on European Union.

    The ESAs also point out that, in order to benefit from the proposed exemption, parties should start negotiating the novation of their transactions which are in the scope of the amending regulation as soon as possible. Should the parties agree on the terms of a novation before the application date, they should provide that the novation would take effect only upon the date of application of this amending regulation.

  • CRR/EMIR - Extension of the transitional periods for third-country CCPs in relation with own funds requirements

  • Background

    The 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 recognition of existing third-country CCPs, Article 497 (2) of Regulation (EU) 575/2013 established a transitional period during which third-country CCPs with which institutions established in the Union clear transactions may be considered qualifying CCPs by those institutions ("CRR", available here).

    CRR amended EMIR in respect of certain inputs to the calculation of institutions' own funds requirements for exposures to third-country CCPs. Accordingly, Article 89(5a) of EMIR requires certain third-country 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 CRR. Those transitional periods have been extended until 15 December 2018 by the Commission implementing regulation (EU) 2018/815 (the "Regulation 2018/815", available here).

    Of the CCP established in third countries that have already applied for recognition in accordance with Article 25 of EMIR, 32 CCPs have been recognised by the ESMA. The remaining third-country CCPs are still awaiting recognition and their recognition process will not be completed by 15 December 2018.

    If the transitional period is not extended, institutions established in the Union (or their subsidiaries established outside the Union) having exposures to those remaining third-country CCPs will be required to increase their own funds for those exposures significantly, potentially leading to the withdrawal of those institutions as direct participants in those CCPs or, at least temporarily, to the cessation of the provision of clearing services to those institutions' clients and thus cause severe disruption in the markets in which those CCPs operate.

    What's new?

    On 5 December 2018, the Commission implementing regulation (EU) 2018/1889 on the extension of the transitional periods related to own funds requirements for exposures to CCPs set out in CRR and EMIR was published in the OJEU (the "Regulation 2018/1889").

    The 15-month periods referred to in Article 497(2) of CRR and in the second subparagraph of Article 89(5a) of EMIR, as most recently extended in the Regulation 2018/815, are extended by an additional 6 months until 15 June 2019.

    The Regulation 2018/1889 is available here.

    What's next?

    The Regulation 2018/1889 entered into force 8 December 2018.

  • CSDR - ESMA releases 2 Consultation Papers on draft guidelines on settlement fails reporting and standardised procedures and messaging protocols

  • Background

    The Regulation (EU) No 909/2014 of the European Parliament and of the Council on improving securities settlement in the EU and on central securities depositories ("CSDs") applies since 1 January 2015 ("CSDR", available here).

    CSDR aims to improve the safety and efficiency of securities settlement, in particular for cross-border transactions, by ensuring that buyers and sellers receive their securities and money on time and without risks. To achieve this objective, CSDR harmonises the timing and framework for securities settlement in the EU. It provides measures to prevent and address failures in the settlement of securities transactions ("settlement fails"), commonly referred to as settlement discipline measures.

    Article 6(2) of CSDR asserts that investment firms authorised pursuant to Article 5 of Directive 2014/65/EU ("MiFID II", available here) shall, where applicable, take measures to limit the number of settlement fails. As of Article 6(3) of CSDR, the ESMA shall issue guidelines in accordance with Article 16 of Regulation (EU) No 1095/2010 (available here) on the standardised procedures and messaging protocols to be used for complying with this requirement.

    Article 7(1) of CSDR provides that for each securities settlement system it operates, a CSD shall establish a system that monitors settlement fails of transactions in financial instruments referred to in Article 5(1) of CSDR. It shall provide regular reports to the competent authority and relevant authorities, as to the number and details of settlement fails and any other relevant information, including the measures envisaged by CSDs and their participants to improve settlement efficiency. Those reports shall be made public by CSDs in an aggregated and anonymised form on an annual basis. The competent authorities shall share with the ESMA any relevant information on settlement fails.

    Article 2 of the Commission Delegated Regulation (EU) 2018/1229 supplementing CSDR outlines measures concerning professional clients with regard to measure to be taken by investment firms to prevent settlement fails (available here).

    What's new?

    On 20 December 2018, the ESMA released two consultation papers seeking stakeholders' view on settlement fails reporting (ESMA70-151-1855 – the "Consultation 1"), standardised procedures, and messaging protocols (ESMA70-151-147 – the "Consultation 2").

    The Consultation 1 represents draft guidelines, which the ESMA has developed under Article 6(2) of CSDR to contribute to the early settlement of transactions on the intended settlement date, and reduce the number of instructions that fail to settle on the intended settlement date. In particular, the Consultation 1 is comprised of the following sections and annexes:

    • Section 2 provides information on the background and mandate;
    • Section 3 contains the proposed guidelines;
    • Annex 1 sets out a summary of the questions contained in the Consultation 1;
    • Annex 2 contains a few illustrative workflows identified on the market for this allocation/confirmation process; and
    • Annex 3 includes a high-level cost-benefit analysis for the draft guidelines.

    Besides, the Consultation 2 presents draft guidelines, which ESMA has developed to ensure the consistent application of Article 7(1) of CSDR and Article 14 of the Commission Delegated Regulation (EU) 2018/1229. It focuses on the scope, reporting architecture and exchange of information between ESMA and national competent authorities regarding settlement fails, based on the reports submitted by CSDs. In particular, the Consultation 2 is comprised of the following sections and annexes:

    • Section 2 contains information on the background and mandate;
    • Section 3 contains the proposed guidelines;
    • Annex IV sets out a summary of the questions contained in the Consultation 2; and
    • Annex V includes a high-level cost-benefit analysis for the draft guidelines.

    The Consultation 1 is available here.

    The Consultation 2 is available here.

    What's next?

    The ESMA will consider all comments to both Consultations received by 20 February 2019, with a view to finalising both sets of guidelines by July 2019.

  • CRA Regulation - ESMA updates its Q&As

  • Background

    The regulatory framework applying to credit rating agencies ("CRAs") is set by Regulation (EC) No 1060/2009 of the European Parliament and of the Council of the EU ("CRA Regulation", available here), as last amended by Regulation (EU) No 462/2013 ("CRA 3" Regulation", available here).

    The European Commission has adopted delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the CRA Regulation (the "CRA Regulation Implementing and Delegated Acts", available here).

    The European Securities and Markets Authority (the "ESMA") provides clarity on the requirements and practices in application of the CRA Regulation, and in particular the CRA 3 Regulation, by publishing responses to questions posed by market participants, including CRAs (ESMA33-5-208 — the "Q&A Document", available here).

    On 2 November 2017, the ESMA last updated its Q&A Document by answering question 12 on page 17 regarding operational requirements.

    What's new?

    On 18 December 2018, the ESMA updated the Q&A Document Part III on methodologies, models and key rating assumptions (ESMA33-5-208, the "Updated Q&A Document").

    In particular, the ESMA modified Q&A 8 (on page 12) on errors in rating methodologies by adding sub points "b" and "c" concerning notification of errors to the ESMA and affected rated entities.

    The Updated Q&A Document is available here.

    What's next?

    The ESMA welcomes feedback and questions from market participants with a view to update, where necessary the Q&A Document.

  • EMIR - ESAs publish amending draft RTS on the clearing obligation and risk mitigation techniques for OTC derivatives not cleared

  • Background

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

    The Regulation (EU) 2017/2402 of the European Parliament and of the Council laying down a general framework for securitisation and creating a specific framework for simple, transparent and standardised ("STS") securitisation entered into force on 17 January 2018 and shall apply as from 1 January 2019 (the "Securitisation Regulation", available here).

    Against this background, the Securitisation Regulation amends EMIR to ensure consistency of treatment between derivatives associated with covered bonds and derivatives associated with securitisations, in relation to the clearing obligation and the margin requirements on non-centrally cleared OTC derivatives. In particular, Article 42 of the Securitisation Regulation amends Articles 4 and 11(15) of EMIR, by giving the European Supervisory Authorities ("ESAs") the following mandates ("Mandates"):

    • The ESAs shall draft RTS specifying criteria for establishing which arrangements under covered bonds or securitisations adequately mitigate counterparty risk and thus the conditions to benefit from an exemption from the clearing obligation; and
    • The ESAs shall draft RTS to determine the level and type of collateral required with respect to OTC derivative contracts that are concluded by covered bond entities in connection with a covered bond, or by a securitisation special purpose entity ("SSPE") in connection with a STS securitisation, meeting the conditions of Article 4(5) of EMIR, taking into account any impediments faced in exchanging collateral with respect to existing collateral arrangements under the covered bond or securitisation.

    From 4 May 2018 to 15 June 2018, based on the Mandates, the ESAs carried out 2 joint consultations to amend EMIR RTS on the clearing obligation and risk mitigation techniques for OTC derivatives not cleared. For public contribution, the ESAs issued:

    • Consultation paper on amendments to the EMIR clearing obligation under the Securitisation Regulation ("JC 2018 14", available here);
      • The ESAs suggest mirroring for securitisation the conditions applicable in the case of covered bonds, excluding certain conditions that are assessed only relevant for covered bonds (e.g. the ESAs clarify that the waiver of the pari passu rank should only apply to covered bonds and that the pari passu ranking should apply with respect to the most senior bondholders); and
      • Article 2 of the draft RTS (as attached under Appendix III t0 JC 2018 14) clarifies which arrangements under the securitisation mitigate counterparty credit risk when the conditions of Article 4(5) of EMIR are also met.
    • Consultation paper on draft RTS amending the DR 2016/2251 under Article 11(15) of EMIR in the context of the STS securitisation under the Securitisation Regulation ("JC 2018 15", available here).

    The proposed new Article 30a of the DR 2016/2251 extends the special provisions adopted for covered bonds on the level and type of collateral required with respect to OTC derivative contracts, to those derivative contracts that are concluded by a SSPE in connection with a STS securitisation.

    What's new?

    On 18 December 2018, the ESAs published 2 joint final draft RTS amending the DR 2016/2251:

    • The Final Draft RTS on amendments to the EMIR clearing obligation under the Securitisation Regulation (JC 2018 76 – the "Final Draft RTS on EMIR Clearing Obligation");
    • Final Draft RTS amending DR 2016/2251 under Article 11(15) of EMIR in the context of STS securitisations under Securitisation Regulation (JC 2018 77 – the "Final Draft RTS on Risk Mitigation Techniques").

    The Final Draft RTS on EMIR Clearing Obligation is available here.

    The Final Draft RTS on Risk Mitigation Techniques is available here.

    What's next?

    The Final Draft RTS on EMIR Clearing Obligation and the Final Draft RTS on Risk Mitigation Techniques are submitted for endorsement to the European Commission.

  • EMIR - ESMA updates its Q&As

  • Background

    The Regulation (EU) No 648/2012 of the European Parliament and of the Council of the EU on OTC derivatives, central counterparties ("CCPs") and trade repositories ("TRs") applies since 16 August 2012 ("EMIR", available here).

    The European Commission has adopted delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in EMIR ("EMIR Delegated Acts", available here).

    The general public and market participants can submit questions on the implementation of EMIR to the European Securities and Markets Authority (the "ESMA"). On 26 September 2018, the ESMA last updated its Q&A document on EMIR (ESMA70-1861941480-52 – the "Q&A Document", available here), with the following clarifications:

    • Part II CCPs Q&A 23 (from page 68 to 69) - It provides a clarification on access models at European CCPs, and specifically models that typically aim at facilitating buy-side or small participant access to CCPs and allowing better capital treatment for clearing members; and
    • Part III TR Q&A 49 (from page 107 to 113) - It provides an explanation on how a reporting counterparty should report an FX swap derivative under Article 9 of EMIR.

    What's new?

    On 3 December 2018, the ESMA updated the Q&A Document (the "Updated Q&A Document") as follows:

    • The ESMA deleted the Part II CCPs Q&A 9 c) (from page 55 to 56), which covers margin requirements under Article 41 of EMIR.

    The Updated Q&A Document is available here.

    What's next?

    The ESMA will continue to develop the Q&A Document on EMIR and update it where required.

  • EMIR/SFTR - Commission issues a Package of 7 final draft delegated regulations

  • Background

    The Regulation (EU) 2015/2365 on transparency of securities financing transactions ("SFTs") and of reuse, and amending the Regulation (EU) No 648/2012 ("EMIR", available here), applies since 12 January 2016, subject to certain transitional provisions ("SFTR", available here). SFTR increases the transparency of SFTs as follows:

    • All SFTs, except those concluded with central banks, shall be reported to central databases known as trade repositories ("TRs");
    • Information on the use of SFTs by investment funds shall be disclosed to investors in the regular reports and pre-investment documents issued by the funds; and
    • Minimum transparency conditions shall be met when collateral is reused, such as disclosure of the risks and the obligation to acquire prior consent.

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

    On 20 April 2017, the ESMA published its final report entitled "Technical advice to EC on fees to TRs under SFTR and on certain amendments to fees to TRs under EMIR" (ESMA70-151-223 – the "Technical Advice", available here).

    On 24 July 2018, the European Commission notified the ESMA of its intention to endorse and amend certain technical standards under SFTR (the "EC Letter", available here).

    On 5 September 2018, the ESMA replied to the EC Letter in a letter (the "ESMA Letter", available here) and an opinion (the "ESMA Opinion", available here).

    What's new?

    On 13 December 2018, the European Commission published the following package of final draft delegated regulations under SFTR and EMIR (the "Package"):

    • Based on Article 12(3)(c) and (d) of SFTR, the Commission Delegated Regulation (EU) …/... supplementing SFTR with regard to regulatory technical standards ("RTS") on access to details of SFTs held in TRs (C(2018) 8330 final, available here);
    • Based on Article 5(7) of SFTR, the Commission Delegated Regulation (EU) …/... supplementing SFTR with regard to RTS specifying the details of the application for registration and extension of registration as a TR (C(2018) 8331 final, available here);
    • Based on Articles 5(7)(a) and 12(3)(a) and (b) of SFTR, the Commission Delegated Regulation (EU) …/... supplementing SFTR with regard to RTS on the collection, verification, aggregation, comparison and publication of data on SFTs by TRs (C(2018) 8332 final – the main part is available here and the annexes are available here);
    • Based on Article 11(1) of SFTR, the Commission Delegated Regulation (EU) …/... supplementing SFTR with regard to fees charged by the ESMA to TRs (C(2018) 8333 final – the main part is available here and the annex is available here);
    • Based on Article 4(9) of SFTR, the Commission Delegated Regulation (EU) …/... supplementing SFTR with regard to RTS specifying the details of SFTs to be reported to TRs (C(2018) 8334 final – the main part is available here and the annex is available here);
    • Based on Article 81(5) of EMIR, the Commission Delegated Regulation (EU) …/... amending Delegated Regulation (EU) No 151/2013 (available here) with regard to access to the data held in TRs (C(2018) 8335 final, available here); and
    • Based on Article 56(3) of EMIR, the Commission Delegated Regulation (EU) …/... amending Delegated Regulation (EU) No 151/2013 as regards RTS specifying the details of the application for registration as a TR (C(2018) 8336 final, available here).

    What's next?

    The Package is subject to the scrutiny of the European Parliament and of the Council of the EU, before being published in the OJEU.

  • MiFID II - Commission publishes amending Draft Delegated Regulation on certain registration conditions to promote the use of SME Growth Markets for the purposes of MiFID II

  • Background

    In September 2015, the European Commission (the "Commission") adopted an action plan on building a Capital Markets Union ("CMU") aiming, among other, to diversify market-based sources of financing for small and medium-sized enterprises ("SMEs") and to promote issuance of bonds and shares by SMEs on public markets (the "CMU Action Plan", available here).

    The Directive of the European Parliament (the "Parliament") and of the Council of the EU (the "Council") on markets in financial instruments ("MiFID II", available here) and the Commission Delegated Regulation (EU) 2017/565 supplementing MiFID II as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of MiFID II (the "Delegated Regulation 2017/565", available here) apply since 3 January 2018.

    MiFID II introduced a new type of multilateral trading venues – the SME Growth Markets, a subgroup of multilateral trading facilities ("MTFs"), in order to facilitate access to capital for SMEs and to further develop specialist markets that aim to cater for the needs of SME issuers.

    From 18 December 2017 to 26 February 2018, the Commission services carried out a public consultation on building a proportionate regulatory environment to support SME listing (the "Consultation Document", available here). It focused on 3 main areas: (i) how to complement the SME Growth Market concept created by MiFID II; (ii) how to alleviate the burden on companies listed on SME Growth Markets; and (iii) how to foster the ecosystems surrounding local stock exchanges, in particular with a view to improving liquidity of shares listed on those trading venues. This public consultation raised specific questions on the non-equity issuer definition for the purpose of SME Growth Market, the half-yearly report obligation for SME Growth Market issuer and the opportunity to impose a minimum free float requirement in the EU legislation.

    From 24 May 2018 to 21 June 2018, the Draft Commission Delegated Regulation EU…/… amending the Delegated Regulation 2017/565 as regards certain registration conditions to promote the use of SME Growth Markets for the purposes of MiFID II was published on the Commission's website to comply with the Better Regulation principles and receive contributions from stakeholders (Ref. Ares(2018)2681237 — the "Draft Delegated Regulation", available here.

    The Commission received 12 contributions from public and private stakeholders. The majority of stakeholders were in favour of the proposed modifications. However, some stakeholders expressed concerns as regards the minimum free float requirement as such a requirement could be seen as an additional obstacle to initial public offerings by small issuers. Nevertheless, if there is no free float on admission, one could question the rationale for an issuer to consider an initial public offering on an SME Growth Market, instead of remaining a private company.

    What's new?

    On 13 December 2018, the Commission published its draft delegated regulation (EU) …/… amending the Delegated Regulation 2017/565 as regards certain registration conditions to promote the use of SME Growth Markets for the purposes of MiFID II (C(2018) 8442 final — the "Final Draft Delegated Regulation").

    The Final Draft Delegated Regulation contains 3 operational provisions;

    • It replaces the definition of a non-equity issuer set out in Article 77(2) of the Delegated Regulation 2017/565 with a new definition based on an issuance size criterion. According to this amendment, a non-equity issuer would be deemed to be an SME for the purpose of identifying an SME Growth Market if the nominal value of its debt issuances over the previous calendar year does not exceed EUR 50 million (excluding loans provided by a credit institution). This definition is intended to facilitate the registration of SME Growth Markets specialised in bonds and those allowing both equity and bond issuance. In order to avoid risks of regulatory arbitrage, this provision also mentions that all the issuances of debt securities that could be made on all trading venues across the EU need to be taken into account in order to determine if an issuer exceeds or not this threshold and can qualify as an SME.
    • It modifies Article 78 (2)(g) of the Delegated Regulation 2017/565 by leaving the flexibility to SME Growth Market operators to impose a half yearly financial report on non-equity issuers. This is intended to establish a level playing field between non-equity issuers on SME Growth Market and those on regulated market which are exempted from the half yearly financial report obligation under the Transparency Directive 2004/109/EC.
    • It introduces a new point (j) in Article 78(2) in the Delegated Regulation 2017/565, requiring listing rules of SME Growth Markets to impose a free float requirement for equity issuers when the shares are admitted to trading for the 1st time (i.e. in case of an initial public offering). Hence, the market operators or investment firms operating SME Growth Markets would have the flexibility to adopt the specific criterion and the threshold as regards this free float requirement. In order to further address the concerns expressed by the stakeholders who submitted contributions regarding the Draft Delegated Regulation, now this requirement can be expressed either as a percentage of the total issued share capital or as an absolute value. It is intended to prevent SME Growth Markets from listing companies that are totally illiquid on admission.

    The Final Draft Delegated Regulation is available here.

    What's next?

    The Final Draft Delegated Regulation will be subject to scrutiny by the Parliament and the Council, before being published in the Official Journal of the EU ("OJEU").

    The Final Delegated Regulation shall enter into force on the day following that of its publication in the OJEU. It shall apply 3 months after entry into force.

  • Data Protection - Regulation 2018/1807 on the free flow of non-personal data in the EU will apply from 29 May 2019

  • Background

    On 13 September 2017, as announced in the "Mid-Term Review on the implementation of the Digital Single Market Strategy" (available here), the European Commission (the "Commission") published its proposal for a regulation of the European Parliament and of the Council on a framework for the free flow of non-personal data in the European Union (COM(2017) 495 final – the "Proposal for a Regulation", available here). The expanding Internet of Things ("IoT"), artificial intelligence and machine learning, represent major sources of non-personal data, for example as a result of their deployment in automated industrial production processes. Non-personal data include aggregate and anonymised datasets used for big data analytics.

    To unlock the potential of the EU data economy, the Proposal aims to address the following issues:

    • Improving the mobility of non-personal data across borders in the Single Market, which is currently limited in many Member States ("MS") by localisation restrictions or legal uncertainty in the market;
    • Ensuring that the powers of competent authorities ("CAs") to request and receive access to data for regulatory control purposes, such as for inspection and audit, remain unaffected; and
    • Making it easier for professional users of data storage or other processing services to switch service providers and to port data, while not creating an excessive burden on service providers or distorting the market.

    From 25 May 2018, the regulation (EU) 2016/679 of the European Parliament and of the Council on the protection of natural persons with regard to the processing of personal data and on the free movement of such data applies ("GDPR", available here). GDPR and the Proposal for a Regulation should provide a coherent set of rules that cater free movement of different types of data. Should technological developments make it possible to turn anonymised data into personal data, such data would be treated as personal data, and GDPR would apply accordingly.

    On 4 October 2018, the European Parliament voted on the Proposal for a Regulation, as amended (the "Parliament Text", available here). On 9 November 2018, the Council of the EU adopted the Parliament Text (available here).

    What's new?

    On 28 November 2018, the regulation (EU) 2018/1807 of the European Parliament and of the Council on a framework for the free flow of non-personal data in the EU was published in the OJEU (the "Regulation 2018/1807").

    As a reminder, the main provisions of the Regulation 2018/1807 are highlighted below:

    • Scope - The Regulation 2018/1807 applies to the processing of electronic data other than personal data (as defined under Article 4(1) of GDPR) in the Union, which is:
      • Provided as a service to users (natural or legal persons) residing or having an establishment in the Union, regardless of whether the service provider is established or not in the Union; or
      • Carried out by a natural or legal person residing or having an establishment in the Union for its own needs.
    • Mixed data set - In the case of a data set composed of both personal and non-personal data, the Regulation 2018/1807 applies to the non-personal data part of the data set. Where personal and non-personal data in a data set are "inextricably linked", the Regulation 2018/1807 shall not prejudice the application of GDPR;
    • Principle of free movement of non-personal data - Data localisation requirements (as defined under Article 3(5) of the Regulation 2018/1807) shall be prohibited, unless they are justified on grounds of "public security" in compliance with the principle of proportionality. MS shall publish the details of any data localisation requirements via a national online single information point;
    • Data availability for CAs - The Regulation 2018/1807 does not affect the powers of CAs to request or obtain access to "data" (as defined under Article 3(1) of the Regulation 2018/1807) in accordance with Union or national law. CAs cannot be refused access to data on the basis that the data are processed in another MS. MS may impose effective, proportionate and dissuasive penalties for failure to comply with an obligation to provide data; and
    • Porting of data for professional users and codes of conduct – The Commission shall encourage and facilitate the development of self-regulatory codes of conduct at Union level covering, inter alia, the following aspects:
      • Best practices for facilitating the switching of service providers and the porting of data in a structured, commonly used and machine-readable format;
      • Minimum information requirements to ensure that professional users (as defined under Article 3(8) of the Regulation 2018/1807) are provided, before a contract for data processing is concluded, with sufficiently detailed, clear and transparent information; and
      • Approaches to certification schemes that facilitate the comparison of data processing products and services for professional users.

    The Regulation 2018/1807 is available here.

    What's next?

    The Regulation 2018/1807 entered into force on 18 December 2018 and will apply from 29 May 2019.

    By 29 May 2019, the Commission shall publish informative guidance on the interaction of the Regulation 2018/1807 and GDPR, especially as regards data set composed of both personal and non-personal data.

    The Commission shall encourage service providers to complete the development of the codes of conduct by 29 November 2019 and to effectively implement them by 29 May 2020.

    By 30 May 2021, MS shall ensure that any existing data localisation requirement laid down in a law, regulation or administrative provision of a general nature and that is not in compliance with Article 4(1) of the Regulation 2018/1807 is repealed. If a MS considers that an existing measure is in compliance with Article 4(1) of the Regulation 2018/1807 and can therefore remain in force, it shall communicate that measure to the Commission, together with a justification for maintaining it in force. Within a period of 6 months from the date of receipt of such communication, the Commission shall examine the compliance of that measure and shall, where appropriate, make comments to the MS in question, including, where necessary, recommending the amendment or the repeal of the measure.

    No later than 29 November 2022, the Commission shall submit an evaluation report on the implementation of the Regulation 2018/1807 to the European Parliament, to the Council of the EU, and to the European Economic and Social Committee.

  • MiFID II/MiFIR - ESMA renews its product intervention measures

  • Background

    The Regulation (EU) No 600/2014 of the European Parliament and of the Council of the EU on markets in financial instruments applies since 3 January 2018 ("MiFIR", available here). Article 40 of MiFIR addresses temporary intervention powers of the European Securities and Markets Authority (the "ESMA"). Under certain conditions, the ESMA may prohibit or restrict in the EU the marketing, distribution or sale of certain financial instruments or financial instruments with certain specified features, or a type of financial activity or practice.

    On 22 May 2018, the ESMA adopted 2 decisions under Article 40 of MiFIR (ESMA35-43-1135 — the "Notice on Decisions", available here). On 1 June 2018, the ESMA decisions were published in the OJEU as:

    • (EU) 2018/795 — to temporarily prohibit the marketing, distribution or sale of binary options ("BOs") to retail clients in the Union, applicable from 2 July 2018 for 3 months (the "Decision 2018/795 on BOs", available here); and
    • (EU) 2018/796 — to temporarily restrict contracts for differences ("CFDs") in the Union, applicable from 1 August 2018 for 3 months (the "Decision 2018/796 on CFDs", available here).

    On 24 August 2018, the ESMA published a press release informing that on 22 August 2018, its Board of Supervisors agreed to renew prohibition on BOs for further 3 months from 2 October 2018 (ESMA71-99-1026 — the "the 1st Press Release on BOs", available here). The ESMA had also agreed on the exclusion of a limited number of products from the scope of the measure.

    On 28 September 2018, the ESMA published a press release informing that on 26 September 2018, its Board of Supervisors agreed to renew the restriction on the marketing, distribution or sale of CFDs to retail clients for further 3 months from 1 November 2018 (ESMA71-99-1041 — the "1st Press Release on CFDs", available here). This renewal includes the following:

    • Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying;
    • A margin close out rule on a per account basis. This will standardise the percentage of margin at which providers are required to close out one or more retail client’s open CFDs;
    • Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
    • A restriction on the incentives offered to trade CFDs; and
    • A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

    On 1 October 2018, the ESMA issued a notice informing that on 21 September 2018, it adopted a decision under Article 40 of MiFIR to prohibit the marketing, distribution or sale of BOs to retail clients (ESMA35-43-1391 — the "Notice on BOs", available here). It has been published in the OJEU as the Decision (EU) 2018/1466 renewing and amending the temporary prohibition in the Decision 2018/795 on BOs, which applies from 2 October 2018 for 3 months (the "Decision 2018/1466 on BOs", available here).

    On 31 October 2018, the ESMA issued a notice informing that on 23 October 2018, it adopted a decision under Article 40 of MiFIR to restrict the marketing, distribution and sale of CFDs to retail clients (ESMA35-43-1397 – the "Notice on CFDs", available here). It has been published in the OJEU as the Decision (EU) 2018/1636 renewing and amending the temporary restriction in the Decision 2018/796 on CFDs (the "Decision 2018/1636 on CFDs", available here). The Decision 2018/1636 on CFDs applies since 1 November 2018 for a period of 3 months.

    On 9 November 2018, the ESMA most recently updated its questions and answers document concerning application of its temporary product intervention measures on the marketing, distribution or sale of CFDs and BOs to retail clients (ESMA35-36-1262 — the "Q&A", available here). It provided clarification on the application of the temporary product intervention measures in relation to the prominence of the risk warning and further explained what is considered "payments for the purpose of entering into a CFD".

    On the same date, the ESMA published a press release stating that on 7 November 2018, its Board of Supervisors agreed to renew prohibition set out in the Decision 2018/1466 on BOs for further 3 months period from 2 January 2019 (ESMA71-99-1057 – the "2nd Press Release on BOs", available here). The 2nd Press Release informed also that the ESMA intends to adopt the renewal measure concerning restriction on BOs in the official languages of the EU in the coming weeks, following which the ESMA will publish an official notice on its website. The measure will then be published in the OJEU and will start to apply from 2 January 2019 for a period of 3 months.

    What's new?

    On 19 December 2018, the ESMA published a press release stating that on 18 December 2018 it has agreed to renew the restriction set out in Decision 2018/1636 on CFDs on the same terms for a further period of 3 months from 1 February 2019 because a significant investor protection concern related to the offer of CFDs to retail clients continues to exist (ESMA71-99-10-78 – the "2nd Press Release on CFDs").

    The 2nd Press Release on CFDs is available here.

    What's next?

    The ESMA intends to adopt the renewal measure concerning restriction on CFDs in the official languages of the EU in the coming weeks, following which the ESMA will publish an official notice on its website. The measure will then be published in the OJEU and will start to apply from 1 February 2019 for a period of 3 months.

  • PRIIPs Regulation/UCITS - SMSG Advice and Responses to ESAs consultation on targeted PRIIPs KID amendments

  • Background

    The Regulation (EU) No 1286/2014 on key information documents ("KIDs") for packaged retail and insurance-based investment products applies in Luxembourg since 1 January 2018 (the "PRIIPs Regulation", available here).

    Against this background, the Commission delegated regulation (EU) 2017/653 supplementing the PRIIPs Regulation lays down regulatory technical standards ("RTS") with regard to the presentation, content, review and revision of the KIDs and the conditions for fulfilling the requirement to provide such documents (the "Delegated Regulation", available here).

    On 1 October 2018, the European Supervisory Authorities (the "ESAs") issued their response to the "Commission request to develop guidance on facilitating the production and distribution of information on investment funds as of 1 January 2020" (JC 2018 55 – the "Response", available here). In the Response, the ESAs express their concerns regarding the possibility of duplicating information requirements for investment funds from 1 January 2020 ("An approach whereby retail investors will receive both PRIIPs KIDs and UCITS KIIDs is not satisfactory and risks undermining the aims of the PRIIPs Regulation"). In particular, the ESAs highlight the importance of legislative changes to avoid such a situation. In addition, in order to address key issues that have arisen from the practical application of the PRIIPs KID, the ESAs intended to propose targeted amendments to the Delegated Regulation during Q4 2018.

    On 12 November 2018, following-up on the Response, the ESAs launched their consultation on draft amendments to the Delegated Regulation until 6 December 2018 (JC 2018 60 – the "Consultation", available here).

    In the Consultation, the ESAs highlight the following changes to the Delegated Regulation:

    • Changes to the approach for performance scenarios as well as a description of several other options that were identified;
    • Potential amendments on a limited number of other specific issues based on the information gathered by the ESAs since the implementation of the KID; and

    Changes in view of the exemption in Article 32 of the PRIIPs Regulation being due to expire and the possible use of the PRIIPs KID by UCITS and relevant non-UCITS funds from 1 January 2020.

    What's new?

    On 4 December 2018, the Securities and Markets Stakeholder Group ("SMSG") published its reply to the Consultation (ESMA22-106-1591 – the "Advice").

    Given that most of the concerns the SMSG has on PRIIPs are not addressed in the Consultation (at least the scope of the PRIIPs Regulation and cost information about funds), and given that the current transparency regime for UCITS has proven to be effective, the SMSG considers that the current exemption of UCITS funds and certain AIFs from PRIIPs should be extended until the review of the PRIIPs Regulation (level 1) has been fully completed, and its conclusion been fully reflected in EU rules.

    Besides, the SMSG believes that an interim targeted review of the Delegated Regulation (level 2) performed in haste is no substitute for the necessary level 1 review and urges both legislators and regulators to proceed as soon as possible with a comprehensive review of the PRIIPs KID. In the long-term, the SMSG considers important to find a consistent approach to investor information for all PRIIPs products, based on adequate consumer testing.

    The Advice is available here.

    What's next?

    On 6 December 2018, the European Fund and Asset Management Association ("EFAMA") and the Association of the Luxembourg Fund Industry ("ALFI") submitted their response to the Consultation (respectively available here and here). In this context, the EFAMA reiterated that the process and sequencing (of review, targeted amendments where necessary and subsequent roll-out of PRIIPs to UCITS) specified by the co-legislators in Articles 32 and 33 of the PRIIPs Regulation must be followed. The ALFI is in favour of a postponement of the UCITS KIID exemption by two years via a quick fix.

    The French Association on investment management (AFG) as well as the German market place association are sharing this view.

  • SFTR - Commission issues 3 final draft Implementing Regulations

  • Background

    The Regulation (EU) 2015/2365 on transparency of securities financing transactions ("SFTs") and of reuse, and amending the Regulation (EU) No 648/2012 ("EMIR", available here), applies since 12 January 2016, subject to certain transitional provisions ("SFTR", available here). SFTR increases the transparency of SFTs as follows:

    • All SFTs, except those concluded with central banks, shall be reported to central databases known as trade repositories ("TRs");
    • Information on the use of SFTs by investment funds shall be disclosed to investors in the regular reports and pre-investment documents issued by the funds; and
    • Minimum transparency conditions shall be met when collateral is reused, such as disclosure of the risks and the obligation to acquire prior consent.

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

    On 20 April 2017, the ESMA published its final report entitled "Technical advice to EC on fees to TRs under SFTR and on certain amendments to fees to TRs under EMIR" (ESMA70-151-223 – the "Technical Advice", available here).

    On 24 July 2018, the European Commission notified the ESMA of its intention to endorse and amend certain technical standards under SFTR (the "EC Letter", available here).

    On 5 September 2018, the ESMA replied to the EC Letter in a letter (the "ESMA Letter", available here) and an opinion (the "ESMA Opinion", available here).

    What's new?

    On 14 December 2018, the European Commission published the following set of final draft implementing regulations under SFTR (the "Set"):

    • Based on Article 5(8) of SFTR, the Commission Implementing Regulation (EU) …/... laying down implementing technical standards ("ITS") with regard to the format of applications for registration and extension of registration of TRs in accordance with SFTR (C(2018) 7657 final – the main part is available here and the annex is available here);
    • Based on Article 4(10) of SFTR, the Commission Implementing Regulation (EU) …/... laying down ITS with regard to the format and frequency of reports on the details of SFTs to TRs in accordance with SFTR and amending Implementing Regulation (EU) No 1247/2012 (available here) with regard to the use of reporting codes in the reporting of derivative contracts (C(2018) 7658 final – the main part is available here and the annexes are available here); and

    Based on Article 25(4) of SFTR, the Commission Implementing Regulation (EU) …/... laying down ITS with regard to the procedures and forms for exchange of information on sanctions, measures and investigations in accordance with SFTR (C(2018) 7659 final – the main part is available here and the annexes are available here).

    What's next?

    The Set is subject to the scrutiny of the European Parliament and of the Council of the EU, before being published in the OJEU.

  • Transparency Directive - Commission issues final draft Delegated Regulation on the specification of a single electronic reporting format

  • Background

    On 26 November 2015, the Directive 2013/50/EU (available here) amending the Directive 2004/109/EC of the European Parliament and of the Council (the "Transparency Directive", available here) on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, entered into force.

    In accordance with Article 4(7) of the Transparency Directive, issuers whose securities are admitted to trading on a regulated market shall prepare all annual financial reports in a single electronic reporting format by 1 January 2020.

    Against this background, the ESMA shall develop draft regulatory technical standards ("RTS") to specify the electronic reporting format, with due reference to current and future technological options. On 18 December 2017, the ESMA published its final report (ESMA32-60-2014 – the "Final Report", available here) on the RTS on the European Single Electronic format ("ESEF"), a specific briefing note (ESMA71-99-671, available here), and the ESEF Reporting Manual (ESMA32-60-254, available here).

    What's new?

    On 17 December 2018, the European Commission issued its final draft delegated regulation supplementing the Transparency Directive with regard to RTS on the specification of a single reporting format (C(2018) 8612 final – the "Delegated Regulation").

    In particular, the Delegated Regulation contains the following provisions:

    • Issuers shall prepare their entire annual financial reports in eXtensible HyperText Markup Language ("XHTML") format;
    • For issuers filing IFRS consolidated financial statements, there is an obligation to mark them up using the eXtensible Business Reporting Language ("XBRL"), in accordance with the taxonomy and specifications laid down in the Annexes;
    • The extent to which the content of annual financial reports shall be marked up with XBRL with a gradual approach (2020 for detailed tagging of the primary financial statements, and 2022 for block tagging of the notes to IFRS consolidated financial statements;
    • Provisions in relation to the marking up of parts of an issuer's financial reports other than IFRS consolidated financial statements, which is allowed If the Member State of incorporation of such issuer provides a taxonomy for such purpose; and
    • Issuers incorporated in third countries shall not mark up any parts of their annual financial reports other than IFRS consolidated financial statements.

    The 6 Annexes to the Delegated Regulation are as follows:

    • Annex I – Legend for Tables 1 and 2 of Annex II, and for the Tables of Annexes IV and VI;
    • Annex II – Mandatory mark-ups;
    • Annex III – Applicable Inline XBRL specifications;
    • Annex IV – Marking up and filing rules;
    • Annex V – XBRL taxonomy files; and
    • Annex VI – Schema of the core taxonomy.

    The main part of the Delegated Regulation is available here.

    The 6 Annexes to the Delegated Regulation are available here.

    What's next?

    The Delegated Regulation and the 6 Annexes are subject to the scrutiny of the European Parliament and of the Council of the EU, before being published in the OJEU.

    The final text of the Delegated Regulation shall apply to annual financial reports containing financial statements for financial years beginning on or after 1 January 2020.

  • LUXEMBOURG

    AML/CFT - CSSF issues Circular 18/702 on the private banking sector

  • Background

    In recent years, the focus of many actors of the Luxembourg's financial centre has gradually shifted to "private banking" activities offering specialised services to an international clientele and high net worth individuals ("HNWI").

    Given the risk factors identified in "private banking" activities, the CSSF has provided the banking sector with targeted guidance aimed at preventing and mitigating existing or emerging money laundering and terrorist financing ("ML/TF") risks in relation to "private banking" (altogether referred as the "CSSF Guidance"). Taking into account international and EU AML/CFT standards, most notably the FATF Recommendations (available here), the CSSF Guidance includes:

    • The Circular letter of 3 December 2012 inviting banks to sign the "ICMA Private Wealth Management Charter of Quality" (available here);
    • The Circular 15/609 of 27 March 2015 on developments in automatic exchange of tax information and AML in tax matters (available here);
    • The Circular 17/650 of 17 February 2017 on the application of the Law of 12 November 2004 on the fight against money laundering and terrorist financing, as amended (the "2004 Law", available here) and of the Grand-ducal Regulation of 1 February 2010 providing details on certain provisions of the AML/CFT Law (the "2010 GDR", available here) to predicate tax offences (available here); and
    • The Circular 17/661 of 24 July 2017 on the adoption of the joint guidelines issued by the three European Supervisory Authorities (EBA/ESMA/EIOPA) on ML and TF risk factors (available here).

    Against this background, the risk analysis carried out by Luxembourg in 2018 identified a 'high risk inherent' in the "private banking" business.

    What's new?

    On 20 December 2018, the CSSF published its circular 18/702 entitled 'Developments regarding the fight against ML/TF in the "private banking" sector' (the "Circular 18/702").

    The Circular 18/702 is addressed to banks and other professionals of the financial sector that perform "private banking" activities, within the meaning of "wealth management" and related activities.

    In this context, the Circular 18/702 is in line with the above-mentioned CSSF Guidance and is intended to guide and raise the awareness of banks so that they continue (i) to strengthen their AML/CFT system and (ii) ensure that mitigation measures of the ML/TF risks they have put in place remain effective.

    In the Circular 18/702, the CSSF highlights the following areas:

    • Section 2 is dedicated to the specific ML/TF risks that the "private banking" sector in Luxembourg is facing;
    • Section 3 relates to effective mitigation measures and procedures against the described risks, and points out to the weaknesses identified during the control performed by the CSSF; and
    • Section 4 describes the significant prudential/reputational impacts of any AML/CFT breach on the Luxembourg financial center and the future focus of intervention for the CSSF in this field.

    The Circular 18/702 is available here (only in French).

    What's next?

    On the operational side, the CSSF reminds that 'defining and implementing risk appetite, identifying the ultimate client/beneficial owner, analysing and documenting the origin of funds, and where applicable the source of wealth, as well as the review of concluded transactions, remain the key areas for ensuring effective ML/TF controls.

    In order to mitigate ML/TF risks in the "private banking" sector, the CSSF will continue to intervene with professionals whose business model presents residual risks deemed too high.

    Similarly, the CSSF will also maintain strict guidelines on the acceptance of new bank shareholders in countries that are particularly exposed to ML/TF risks, primary offenses or international financial sanctions.

    In addition, the CSSF will continue to adapt its control program (on-site and off-site) to ensure compliance with AML/CFT regulations. The CSSF notes that it will resolutely and firmly sanction serious deficiencies that could be detected and which will be repressed, if necessary, through significantly higher fines in accordance with the new Article 8-4 of the 2004 transposing the 4th Anti-Money Laundering Directive. These sanctions will be published in accordance with the applicable regulatory provisions.

  • AML/CFT - Further legislative steps (Bill 7217)

  • Background

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

    On 18 February 2018, the Luxembourg Law of 13 January 2018 resulting from the adopted Bill 7128 (available here in French only) and mostly transposing 4AMLD provisions entered into force ("4AMLD Transposition Law", available here only in French).

    Further, in order to transpose Articles 30 and 31 of 4AMLD, the Luxembourg Government submitted the following bills to the Luxembourg Parliament for adoption on 6 December 2017:

    • The bill 7216 establishing a register of "express" trusts ("Bill 7216", available here only in French); and
    • The bill 7217 relating to the register of information on beneficial owners of companies and other legal entities (i.e. "Registre des bénéficiaires effectifs" or "BO Register") and their obligations in relation to their beneficial owner(s) ("Bill 7217", available here only in French).

    On 9 July 2018, the Directive (EU) 2018/843 of the European Parliament and of the Council amending 4AMLD entered into force ("5AMLD", available here). The main changes introduced by 5AMLD involve: (i) broadening access to information on beneficial ownership ("BO"), improving transparency in the ownership of companies and trusts; (ii) addressing risks linked to prepaid cards and virtual currencies; (iii) cooperation between FIUs; and (iv) improved checks on transactions involving high-risk 3rd countries.

    On 10 July 2018, the Luxembourg Government submitted an updated version of the Bill 7217 to the Luxembourg Parliament (N° 7217/09 – the "Updated Bill 7217", available here). The objective of such amendments was to implement 5AMLD provisions relating to access to information on BO. In this context, the main evolution was the opening to the public of the access to the BO Register, without having to justify a legitimate interest (i.e. amendment 5 to the Bill 7217).

    On 24 July 2018, the Luxembourg Conseil d’État ("CE") issued its opinion on the Updated Bill 7217, in which it expressed formal objections to Articles 1, 4, 11, 16, 20, 21, 22, 23 and 24 of the Updated Bill 7217 (N° 7217/10 – the "Opinion 1", available here only in French).

    On 2 August 2018, the Institut des Réviseurs d'Entreprises raised its complementary opinion on the Updated Bill 7217 (N° 7217/11, available here only in French). On 7 August 2018, the Board of Notaries raised its complementary opinion on the Updated Bill 7217 (N° 7217/12, available here only in French).

    On 8 October 2018, the Luxembourg Government submitted another set of 29 amendments to the Updated Bill 7217 to the Luxembourg Parliament (N° 7217/14 – the "Amendments", available here only in French).

    What's new?

    On 27 November 2018, following-up on the Opinion 1, the CE issued an additional opinion on the Updated Bill 7217 and the Amendments (N° CE 52.580 – the "Additional Opinion").

    In this context, the CE withdrew the formal objections set out in the Opinion 1 and expressed no further formal objections to the Amendments.

    The Additional Opinion is available here (only in French).

    What's next?

    The Updated Bill 7217 is still under discussion at the Luxembourg Parliament.

    5AMLD will apply as from 10 January 2020.

    The Directive (EU) 2018/1673 of the European Parliament and of the Council on combating money laundering by criminal law ("6AMLD", available here) will enter into force on 2 December 2018 and will apply as from 3 December 2020.

  • AML/CFT - Parliament votes at first reading on the Bill 7217 concerning the BO Register

  • Background

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

    On 18 February 2018, the Luxembourg Law of 13 January 2018 resulting from the adopted Bill 7128 (available here in French only) and mostly transposing 4AMLD provisions entered into force (the "4AMLD Transposition Law", available here only in French).

    Further, in order to transpose Articles 30 and 31 of 4AMLD, the Luxembourg Government submitted the following bills to the Luxembourg Parliament for adoption on 6 December 2017:

    • The bill 7216 establishing a register of "express" trusts ("Bill 7216", available here only in French); and
    • The bill 7217 relating to the register of information on beneficial owners of companies and other legal entities (i.e. "Registre des bénéficiaires effectifs" or "BO Register") and their obligations in relation to their beneficial owner(s) ("Bill 7217", available here only in French).

    On 9 July 2018, the Directive (EU) 2018/843 of the Parliament and of the Council amending 4AMLD entered into force ("5AMLD", available here). The main changes introduced by 5AMLD involve: (i) broadening access to information on beneficial ownership ("BO"), improving transparency in the ownership of companies and trusts; (ii) addressing risks linked to prepaid cards and virtual currencies; (iii) cooperation between FIUs; and (iv) improved checks on transactions involving high-risk 3rd countries.

    On 10 July 2018, the Luxembourg Government submitted an updated version of the Bill 7217 to the Luxembourg Parliament (N° 7217/09 – the "Updated Bill 7217", available here). The objective of such amendments was to implement 5AMLD provisions relating to access to information on BO. In this context, the main evolution was the opening to the public of the access to the BO Register, without having to justify a legitimate interest (i.e. amendment 5 to the Bill 7217).

    On 24 July 2018, the Luxembourg Conseil d’État (the "CE") issued its opinion on the Updated Bill 7217, in which it expressed formal objections to Articles 1, 4, 11, 16, 20, 21, 22, 23 and 24 of the Updated Bill 7217 (N° 7217/10 – the "Opinion 1", available here only in French).

    On 8 October 2018, the Luxembourg Government submitted another set of 29 amendments to the Updated Bill 7217 to the Luxembourg Parliament (N° 7217/14 – the "Amendments", available here only in French).

    On 27 November 2018, following-up on the Opinion 1, the CE issued an additional opinion on the Updated Bill 7217 and the Amendments (N° CE 52.580 – the "Additional Opinion"). In this context, the CE withdrew the formal objections set out in the Opinion 1 and expressed no further formal objections to the Amendments.

    On 14 December 2018, the Legal Commission of the Luxembourg Parliament released its report on the Updated Bill 7217, as amended (N° 7217/19 – the "Report", available here only in French).

    What's new?

    On 18 December 2018, based on the Report, the Luxembourg Parliament voted at first reading on the Updated Bill 7217, as amended, and requested the CE to waive the second constitutional vote. All the legislative steps in relation to such Bill are available here (only in French).

    What's next?

    On 21 December 2018, the Luxembourg Conseil d’État should waive the second constitutional vote on the Updated Bill 7217, as amended.

    5AMLD will apply as from 10 January 2020.

    The Directive (EU) 2018/1673 of the European Parliament and of the Council of 23 October 2018 on combating money laundering by criminal law will apply as from 3 December 2020 ("6AMLD", available here).

  • BMR - CSSF issues 2nd Communication

  • Background

    The Regulation (EU) 2016/1011 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds applies since 1 January 2018 ("BMR", available here).

    On 30 October 2017, the CSSF issued its press release 17/36 in relation to BMR (the "PR17/36", available here only in French). In the PR17/36, the CSSF reminded most notably supervised entities (as defined under Article 3(1)(17) of BMR) of their future BMR obligations where relevant (e.g. in Articles 28 and 29 of BMR). In particular, the CSSF highlighted that (i) the information as referred to under Article 29(2) of BMR shall be mentioned in transferable securities’ prospectuses as from 1 January 2018 and that (ii), for UCITS prospectuses approved prior to 1 January 2018 and using benchmarks, the underlying documents shall be updated at the first occasion or at the latest within 12 months after that date.

    What's new?

    On 27 November 2018, following-up on the PR17/36, the CSSF issued a second communication in relation to BMR (the "Communiqué").

    In the Communiqué, the CSSF reminds that contributors providing input data for the establishment of benchmarks are, among others, in scope of certain BMR provisions. More specifically, entities under CSSF's supervision, which provide input data for the establishment of benchmarks to an administrator located in the Union, shall notify the CSSF.

    The Communiqué is available here (only in French).

    What's next?

    Further questions regarding BMR can be submitted to the CSSF at benchmarks@cssf.lu.

  • Financial Reporting - BCL issues Calendar of remittance dates for the statistical reporting of investment funds in 2019

  • Background

    The Banque Centrale du Luxembourg (the "BCL") establishes and publishes a calendar with remittance dates for statistical reports on its website. For investment funds, the BCL should receive the following statistical reports:

    • Monthly reports entitled "S 1.3 L3" (available here) and "TPTOBS L2" (available here) must be provided by all money market funds ("MMF") no later than 10 working days after the end of the reference period;
    • Monthly reports entitled "S 1.6 L1" (available here) and "TPTOBS L2" (available here) must be provided by certain non-MMF investment funds no later than 20 working days after the end of the reference period; and
    • Quarterly report entitled "S 2.13 L1" (available here) must be provided by all non-MMF investment funds no later than 20 working days after the end of the reference period.

    In November 2017, the BCL released its calendar of remittance dates for the statistical reporting of investment funds in 2018 (the "2018 Calendar", available here).

    What's new?

    On 21 November 2018, the BCL issued the calendar of remittance dates for the statistical reporting of investment funds in 2019 (the "2019 Calendar").

    The 2019 Calendar is available here.

    What's next?

    For MMF, the remittance date for the reports of January 2019 ("S 1.3 L3" and "TPTOBS L2") is set on 14 February 2019.

    For non-MMF investment funds, (i) the remittance date for the reports of January 2019 ("S 1.6 L1" and "TPTOBS L2") is set on 28 February 2019, and (ii) the remittance date for the quarterly report of March 2019 ("S 2.13 L1") is set on 30 April 2019.

  • HONG KONG

    Securities and Futures Commission (“SFC”) concludes consultation on amendments to the Code on Unit Trusts and Mutual Funds

  • Background

    The Securities and Futures Commission (SFC) released consultation conclusions on proposed amendments to the Code on Unit Trusts and Mutual Funds (UT Code) on 06 December 2018.

    The SFC will implement the proposals set out in the consultation paper with some modifications and clarifications. These include modifications to the calculation method for funds’ derivatives investments and clarification of the enhanced obligations of trustees and custodians.

    "These changes will ensure that our regulations governing public funds are fit for purpose and fully aligned with international standards," said Mr Ashley Alder, the SFC’s Chief Executive Officer. "A robust regulatory regime that adapts to the opportunities and risks presented by financial innovation and market development is key to foster the growth of the retail fund industry in Hong Kong."

    Consequential amendments to the SFC Code on MPF Products (MPF Code), Code on Pooled Retirement Funds (PRF Code) and Code on Investment-Linked Assurance Schemes (ILAS Code) will also be implemented, with appropriate modifications. The revised UT Code, MPF Code, PRF Code and ILAS Code will become effective after gazettal, tentatively on 1 January 2019.

    The SFC will publish frequently asked questions to provide further guidance to the industry regarding the implementation and transition arrangements for the revised UT Code.

    What's new?

    Key amendments include strengthening requirements for key operators (management companies, trustees and custodians), providing greater flexibility and enhanced safeguards for funds’ investment activities (particularly in relation to derivatives, securities lending, and repo and reverse repo transactions), and introducing new fund types such as active ETFs.

    What's next?

    The revised UT Code (as set out in Appendix A to the conclusions paper) and the revised MPF Code, PRF Code and ILAS Code incorporating the corresponding consequential amendments (as respectively set out in Appendices C, D and E to the conclusions paper) are scheduled to be gazette on 14 December 2018.

    A 12-month transition period from the effective date of the revised UT Code will generally be provided for existing SFC-authorized funds. The same implementation timetable will apply to the revised MPF Code and PRF Code (wherever applicable). We will generally allow a 12-month transition period for compliance with the revised ILAS Code for existing investment-linked assurance schemes.

  • Securities and Futures Commission (“SFC”) concludes further consultation on the financial resources rules

  • Background

    On 19 December 2018, the Securities and Futures Commission (SFC) released conclusions to the further consultation on proposed amendments to update the Securities and Futures (Financial Resources) Rules (FRR). After considering the comments received, the SFC will implement the proposed changes, the main purpose of which is to update the computation basis of the financial resources requirements in response to market developments and to facilitate the business operation of licensed corporations.

    What's new?

    Key changes include relaxing the treatment for foreign currencies subject to exchange control, clarifying the treatment for non-freely floating foreign currencies, introducing and updating haircut percentages for certain types of securities and investments and refining the treatments for amounts receivable arising from securities transactions. A number of futures and stock exchanges will also be added to the list of specified exchanges in the FRR.

    "These changes are necessary to catch up with latest market developments," said Mr Ashley Alder, the SFC’s Chief Executive Officer. "They will also streamline the existing financial resources requirements and facilitate licensed corporations’ participation in Mainland and overseas markets."

    What's next?

    The proposed amendments, gazetted today, will be submitted to the Legislative Council for negative vetting. Subject to the legislative process, the amended rules will come into effect on 1 April 2019, with the exception of amendments related to a new accounting standard which will take effect on 1 January 2019, the effective date of the new standard.

  • 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, CACEIS Group Legal Manager - Projects & Regulatory Monitoring

    Permanent Editorial Committee
    Gaëlle Kerboeuf, CACEIS Group Legal Manager - Projects & Regulatory Monitoring
    Elisabeth Raisson, CACEIS Group Compliance
    Corinne Brand, CACEIS Group Communications Specialist
    Pauline Fieni, CACEIS Compliance and Regulatory Watch

    Support
    Michele Tuen, Head of Trustee and Legal (Hong Kong)
    Stefan Ullrich, Head of Legal (Germany)
    Fanny Pereira, Legal (France)
    Clément Nicolaizeau, Legal (France)
    Mireille Mol (the Netherlands)
    Charles du Maisnil, Head Compliance, risk  and Legal (Belgium)
    Domitille Jeanson, Legal (Belgium)
    Jennifer Yeboah, Legal (Belgium)
    Isabella Guscetti, Legal and Compliance (Switzerland)
    Thibault Rhenter, Legal Fund Structuring (Switzerland)
    Robin Donagh, Legal Advisor (Ireland)
    Neil Coxhead (UK)
    Costanza Bucci (Italy)
    Sylvie Becker (Luxembourg)
    Fernand Costinha (Luxembourg)

    Design
    CACEIS Group Communications

    Photos credit
    CACEIS, Adobe Stock

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