SCANNING MAY 2017
European Regulatory Watch Newsletter
EMIR - CSSF reminds obligations of non-financial counterparties to derivative contracts
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).
In order to reduce the risk of the derivatives markets and to improve transparency, EMIR and related technical standards (the "EMIR legislation") introduced for counterparties to a derivative contract the following set of obligations:
- Clearing obligation;
- Obligation to apply risk mitigation techniques;
- Reporting obligation;
- Additional requirements for non-financial counterparties ("NFCs", as defined under Article 2(9) of EMIR), e.g. notifying ESMA and the competent authority when they exceed the clearing threshold and when they no longer exceed it.
Pursuant to Article 1(2) of the Luxembourg Law of 15 March 2016 on OTC derivatives, CCPs and TRs and amending different laws relating to financial services (the "Law", available here only in French), the CSSF is responsible for ensuring the compliance with EMIR obligations by those NFCs which are not supervised.
On 11 May 2017, CSSF issued a reminder on the obligations of NFCs to derivative contracts (the "Communiqué").
In the Communiqué, CSSF reminds the NFCs of their EMIR obligations and prompts a timely and comprehensive application of all of them.
In particular, CSSF believes that the following measures have to be implemented by NFCs in order to fully comply with the EMIR legislation:
- Identification of an organisational unit and/or responsible person (according to the size of entity) who is responsible for ensuring the on-going compliance with the EMIR legislation;
- Adoption of procedures formalising functional activities in compliance with the EMIR requirements applicable to the entity;
- Adoption of control tools on the quality of data reported to the TRs, either directly or through delegation to a third party.
- In addition, in accordance with Article 2(1) of the Law, CSSF requires all NFCs who conclude derivative transactions to provide the CSSF, within 30 days of publication of this notice, with the name, email address and telephone number of the person responsible for the organisation unit referred above.
The Communiqué is available here.
For the year 2017, the CSSF supervisory activities related to EMIR will include the following priorities:
- Priority 1 – The quality of the data reported to the TRs;
- Priority 2 – The monitoring of derivative transactions entered into for hedging purposes;
- Priority 3 – The monitoring of risk mitigation techniques.
Financial Services - CSSF publishes 4 circulars on IT outsourcing and cloud computing
According to Articles 5 (1a) and 17(1) of the Law of 5 April 1993 on the financial sector, as amended (the "1993 Law", available here), credit institutions and investment firms 'shall have robust internal governance arrangements, which include a clear organisational structure with well defined, transparent and consistent lines of responsibility, effective processes to identify, manage, monitor and report the risks they are or might be exposed to, and adequate internal control mechanisms, including sound administrative and accounting procedures and remuneration policies and practices allowing and promoting a sound and effective risk management, as well as control and security arrangements for information processing systems'.
The same principles apply to payment institutions pursuant to Article 11(2) of the Law of 10 November 2009 on payment services, on the activity of electronic money institution and settlement finality in payment and securities settlement systems, as amended (the "2009 Law", available here).
On 11 April 2005, CSSF issued its circular 05/178 concerning notably IT outsourcing (the "Circular 05/178", available here).
On 22 March 2006, CSSF released its circular 06/240 concerning notably IT outsourcing and details regarding services provided under the status of support PFS, and amendment of IT outsourcing conditions for branches located abroad (the "Circular 06/240", available here).
On 11 December 2012, CSSF published its circular 12/552 on central administration, internal governance and risk management (the "Circular 12/552", available here).
At the international level, "cloud computing" is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g. networks, servers, storage, applications, and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.
On 18 May 2017, CSSF published the following 4 circulars:
- Circular CSSF 17/654 concerning IT outsourcing relying on a cloud computing infrastructure (the "Circular 17/654");
- Circular CSSF 17/655 updating Circular 12/552 on the central administration, internal governance and risk management (the "Circular 17/655");
- Circular CSSF 17/656 concerning notably IT outsourcing (the "Circular 17/656");
- Circular CSSF 17/657 concerning notably IT outsourcing and details regarding services provided under the status of support PFS, and amendment of IT outsourcing conditions for branches located abroad (the "Circular 17/657").
The Circular 17/654 applies to credit institutions and PFS as defined under the 1993 Law, and to payment institutions and electronic money institutions as defined under the 2009 Law. The Circular 17/654 clarifies the applicable regulatory framework for IT outsourcing relying on a cloud computing infrastructure provided by an external provider. The use of private clouds without outsourcing is thus excluded from the scope of this circular.
In addition, the Circular 17/654 specifies the five main characteristics of "cloud computing" and the requirements for outsourcing on a cloud computing infrastructure (e.g. resource operation, governance, notification and consent of customers, notification to CSSF or authorisation by CSSF, security systems, etc.). These requirements apply to the entire outsourcing chain as long as all outsourcing (activities) are exclusively of a data-processing/IT nature ("nature informatique") and at least one outsourcing (activity) corresponds to the definition of "cloud computing". The requirements of this circular therefore do not apply to "business process outsourcing", even if these outsourcing (activities) are themselves based on an outsourced cloud computing infrastructure.
When IT outsourcing do not fulfil the conditions of paragraphs 14 and 17 of the Circular 17/654, they remain subject to the Circular 17/656 or to the sub-chapter 7.4 "outsourcing" of the Circular 12/552, as the case may be. The Circular 17/655 updates the Circular 12/552 (by notably introducing a new second paragraph to the point 181 of this circular) to take into account the application scope of Circular 17/654.
The purpose of the Circular 17/656 is to clarify the application of Article 17 (2) of the 1993 Law for PSF and of Articles 11 (2) and (4) and 24-7 (2) and (4) of the 2009 Law for electronic money institutions and payment institutions when they rely on a third party for the provision of IT services. By doing so, the Circular 17/656 brings the standards for electronic money institutions, payment institutions as well as PFS other than investment firms into line with the standards of Circular 12/552. The Circular 17/656 also enhances clarity on the conditions for outsourcing IT activities as regards support PFS and their branches located abroad. The Circular 17/656 repeals and replaces the Circular 05/178.
The aim of the Circular 17/657 is to update Circular 06/240 to take into account the changes introduced by the Circulars 17/654, 17/655 and 17/656 (e.g. references to the repealed Circular 05/178 are replaced with references to the Circular 17/656).
The Circular 17/654 is available here (only in French).
The Circular 17/655 is available here (only in French).
The Circular 17/656 is available here (only in French).
The Circular 17/657 is available here (only in French).
The Circulars 17/654, 17/655, 17/656 and 17/657 apply as from 18 May 2017.
EMIR - Commission overhauls EMIR
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).
EMIR aims at reducing systemic risks to the financial system arising from derivatives transactions by increasing the transparency of the OTC derivatives market, by mitigating the counterparty credit risk and by reducing the operational risk associated with OTC derivatives.
In accordance with Article 85(1) of EMIR, the EU Commission carried out between 2015 and 2016 an extensive assessment of EMIR, which includes:
- A public consultation and a public hearing on the review of EMIR (respectively available here and here);
- An evaluation of EMIR rules as part of the call for evidence on the EU regulatory framework for financial services (available here);
- The publication of a general report on EMIR, submitted by the EU Commission to the EU Parliament and the Council of the EU in November 2016 (the "Report", available here);
- The publication of an inception impact assessment on possible amendments to EMIR within the framework of the regulatory fitness and performance program (the "REFIT", available here).
In this context, the EU Commission pointed out the possibility to amend EMIR in some specific areas, so as to eliminate disproportionate costs and burdens on certain derivatives counterparties without compromising financial stability.
On 4 May 2017, the EU Commission published its regulation proposal to amend EMIR, in order to provide simpler and more proportionate rules for the EU OTC derivatives market (COM(2017) 208 final, the "Regulation Proposal") and a Q&A on the Regulation Proposal.
The main amendments to EMIR contained in the Regulation Proposal are highlighted below:
- Amendments to the calculation of clearing thresholds (e.g. for non-financial counterparties);
- Amendments with a view to incentivise clearing and to increase access to it (e.g. clearing services);
- Amendments to requirements for CCPs’ transparency (e.g. simulation tool);
- Amendments to the risk-mitigation techniques for OTC derivative contracts not cleared by a CCP (e.g. ESAs mandate to develop draft RTS);
- Amendments to the reporting obligation (e.g. intra-group transactions);
- Amendments to ensure the quality of data reported to TRs;
- Amendments to the registration and supervision of TRs;
- Amendments to the requirements for data availability in TRs.
The Regulation Proposal and the related annex I are available here.
The Q&A on the Regulation Proposal is available here.
The EU Commission has put the Regulation Proposal forward for adoption by the EU Parliament and the Council of the EU.
EMIR - 21 June 2019 is the new clearing obligation deadline for Category 3 counterparties
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).
In accordance with Article 5(2) of EMIR, the EU Commission is empowered to adopt draft regulatory technical standards ("RTS") in relation to the clearing obligation, most notably on the date from which the clearing obligation takes effect, including any phase in and the categories of counterparties to which the obligation applies.
In this context, there are currently four EU Commission delegated regulations in force on the clearing obligation:
- EU Commission delegated regulation 2015/2205 (available here);
- EU Commission delegated regulation 2016/592 (available here);
- EU Commission delegated regulation 2016/1178 (available here) all together the "Three Delegated Regulations");
As regards the Category 3 counterparties (i.e. financial counterparties ("FC") and certain funds which are classified as non-financial counterparties ("NFC") belonging to a group whose aggregate positions in OTC derivatives are EUR 8 billion or below), the start date of the clearing obligation was set as follows:
- 21 June 2017 for OTC interest rate derivatives denominated in EUR, GBP, JPY, and USD;
- 9 February 2018 for OTC index credit default swaps and for OTC interest rate derivatives denominated in NOK, PLN and SEK.
On 14 November 2016, ESMA published its final report on the clearing obligation for FC with a limited volume of activity (ESMA/2016/1565 - the "Final Report", available here).
On 16 March 2017, the EU Commission published its delegated regulation amending delegated regulations (EU) 2015/2205, (EU) 2016/592 and (EU) 2016/1178 as regards the deadline for compliance with clearing obligations for certain counterparties dealing with OTC derivatives (C(2017) 1658 final – the "Delegated Regulation", available here).
Built on the Final Report, the Delegated Regulation amends point (c) of Article 3(1) in each of the Three Delegated Regulations, so that the phase-in periods for Category 3 counterparties are extended to 21 June 2019. Hence, it aligns the date in which all three clearing obligations mentioned above take effect with respect to Category 3 counterparties.
What's new ?
On 29 April 2017, the Delegated Regulation was published in the Official Journal of the EU (the "Delegated Regulation (EU) 2017/751").
The Delegated Regulation (EU) 2017/751 is available here.
The Delegated Regulation (EU) 2017/751 enters into force on 19 May 2017.
MAR - Corrigendum published in the OJEU with regard to mandatory disclosures in investment recommendations
Beside prohibiting market manipulation, MAR prohibits the following behaviors: entering into a transaction, placing an order to trade or engaging in behavior which gives, or is likely to give, a false or misleading signal as to the supply of, demand for, or price of, an instrument within the scope of MAR, or which secures, or is likely to secure, the price of such an instrument at an abnormal or artificial level.
On 9 March 2016, the commission delegated regulation (EU) 2016/958 was adopted by the EU Commission to supplement MAR with regards to regulatory technical standards ("RTS") for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest (the "Recommendation" and the "Commission Delegated Regulation", available here).
The Commission Delegated Regulation provides in its Article 6 additional disclosure obligations in the Recommendation by the following persons listed in Article 3(34)(i) of MAR:
- Independent analyst;
- Investment firm and credit institution;
- Any other person whose main business is to produce investment recommendations;
- A natural person working for them under a contract of employment or otherwise, which, directly or indirectly, expresses a particular investment proposal in respect of a financial instrument or an issuer; and
On 27 April 2017, a corrigenda to the Commission Delegated Regulation was published in the Official Journal of the EU (the "Corrigendum").
Besides minor amendments, the Corrigendum specifies that additional disclosure should be inserted in the Recommendation by the persons referred to in Article 3(34)(i) of MAR above, 'if the holdings of the issuer in the total issued share capital of the person or expert exceed 5 %, a statement to that effect’.
The Corrigendum is available here.
MiFID - ESMA follows up on conduct of business rules
Directive 2014/65/EU as amended by Directive (EU) 2016/1034 ("MiFID II", respectively available here and here) and Regulation (EU) 600/2014 as amended by Regulation (EU) 2016/1033 ("MiFIR", respectively available here and here) entered into force on 2 July 2014. MiFID II and MiFIR, together with most of the EU Commission delegated acts as well as regulatory and implementing technical standards ("RTS/ITS"), shall apply as from 3 January 2018.
Providing fair, clear and not misleading information to clients is a corner stone for investor protection under MiFID. On 11 December 2014, ESMA issued its peer review entitled 'MiFID - Conduct of Business, fair, clear and not misleading information' (ESMA/2014/1485 – the "Peer Review", available here).
In the Peer Review, ten National Competent Authorities ("NCAs") were found to be not fully applying certain criteria considered essential for effectively ensuring the application of MiFID rules. The follow-up work was hence launched in September 2016 through letters of ESMA’s chair addressed to the heads of these ten NCAs.
On 18 May 2017, ESMA published its follow-up report on the Peer Review (ESMA42-113-627 – the "Follow-up Report").
In the Follow-up Report, six of the NCAs (i.e. FMA Liechtenstein, LB Lithuania, MFSA Malta, KNF Poland, CMVM Portugal, and ASF Romania) reported to have addressed all deficiencies.
For the remaining four NCAs, one (i.e. Finanstilsynet Denmark, EFSA Estonia, and HCMC Greece) or more deficiencies (i.e. CySEC Cyprus) remain.
The Follow-up Report is available here.
ESMA trusts that the four NCAs, in which deficiencies remain, will address those under the new MiFID II/MiFIR regime applying as from 3 January 2018.
PRIIPs - Corrigendum to RTS annexes published in the OJEU
The PRIIPs Regulation lays down uniform rules on the format and content of the key information document for PRIIPs ("KID") to be drawn up by PRIIPs manufacturers and on the provision of the KID to retail investors in order for them to better understand and compare the key features and risks of the PRIIPs.
On 8 March 2017, the EU Commission issued its delegated regulation addressing the concerns and endorsing the amendments (PE587.693v01-00) proposed by the Committee on Economic and Monetary Affairs ("ECON") on 30 August 2016 (C (2017) 1473 final, the "Commission Delegated Regulation", available here).
The Commission Delegated Regulation hence takes account of the following:
- The disclosure of comprehension alert in KIDs;
- The risk categorisation of insurance products;
- The specific nature of Multi-Option Products ("MOPs");
- The inclusion of 4 performance scenarios in KIDs.
On 29 March 2017, the EU Parliament issued a recommendation for a decision to raise no objections to the Commission Delegated Regulation.
On 12 April 2017, the Commission Delegated Regulation (EU) 2017/653 of 8 March 2017 supplementing the PRIIPs Regulation was published in the OJEU (the "Delegated Regulation 2017/653", available here).
On 11 May 2017, a corrigendum to the Commission Delegated Regulation 2017/653 was published in the OJEU (the "Corrigendum").
The Corrigendum introduces the following modifications:
- The formula on the VaR-equivalent volatility ("VEV") for market risk measure (points 13 and 17) in the annex II ("Methodology for the presentation of risk") to the Delegated Regulation 2017/653 has been modified;
- The formula on the calculation of the stress scenario for Category 3 PRIIPs (point 13(d)) in the annex IV ("Performance scenarios") to the Delegated Regulation 2017/653 has been inserted.
The Corrigendum is available here.
The PRIIPs Regulation and the Delegated Regulation 2017/653 shall apply as from 1 January 2018.
SRD2 - SRD2 published in the OJEU
On 11 July 2007, Directive 2007/36/EC of the European Parliament and of the Council was adopted ("SRD 1" available here). It aims at tackle shortcomings of shareholders rights to enable shareholders regardless of their residence into the EU, to exercise their voting rights. SRD 1 applies since 3 August 2009.
In its communication of 12 December 2012 entitled "Action Plan: European company law and corporate governance - a modern legal framework for more engaged shareholders and sustainable companies", the EU Commission announced a number of actions in the area of corporate governance, in particular to encourage long-term shareholder engagement and to enhance transparency between companies and investors.
Hence, on 9 April 2014, the EU Commission issued a draft proposal amending shareholders rights directive, also referred to as "SRD2" (available here).
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 2 proposal (the "SRD 2 Proposal").
On 14 March 2017, the EU Parliament adopted its position at first reading with a view to the adoption of SRD 2. On the same date, the EU Commission released a Q&A (available here).
On 23 March 2017, the Council of the EU adopted the SRD2 proposal (available here). As a reminder, SRD2 includes the following five main changes to the SRD 1 regime:
- Stronger shareholders rights and facilitation of shareholders voting (including shareholders identification requirements);
- Transparency over asset managers and institutional investors engagement policy (including description of most significant votes) as well as transparency over institutional investors equity investment strategy;
- More transparency over proxy advisors key procedures, including their cod of conducts;
- Shareholders right to vote on remuneration policy and remuneration report ("say on pay");
- Transparency over material related party transactions that are most likely to create risks for minority shareholders.
On 20 May 2017, the SRD 2 was published in the Official Journal of the EU (Directive (EU) 2017/828 – the "SRD2 Final Text").
The SRD2 Final Text is available here.
The SRD2 shall apply by 10 June 2019.
Financial Services - IMF issues Luxembourg FSAP report
On 6 December 2013, the International Monetary Fund ("IMF") reviewed the experience with the implementation of the decision adopted in September 2010 (available here), to integrate financial stability assessments under the Financial Sector Assessment Program ("FSAP") into Article IV Surveillance on a mandatory basis for 29 member countries with systemically important financial sectors (available here).
Luxembourg is deemed by IMF to have a systemically important financial sector and the present report is part of bilateral surveillance. The previous FSAP key recommendations for Luxembourg were released on 28 June 2011 (available here).
The FSAP mission visited Luxembourg during 12-27 September 2016 and 29 November-14 December 2016. The FSAP findings were discussed with the competent authorities during the Article IV consultation in March 2017 (which ended on 5 May 2017, available here).
On 15 May 2017, IMF published its Luxembourg FSAP report based on the work of the FSAP mission (the "Luxembourg Report").
The IMF notes that the financial soundness indicators for Luxembourg’s financial system, have remained relatively robust but some structural characteristics of the financial system could give rise to potential vulnerabilities. They also conclude that the prudential oversight system seem to function well and suggest to address some remaining gaps. They also note that the regulation and supervision of investment funds is prudent but could be strengthened.
Among the 22 key recommendations summarised in the Table 1 to the Luxembourg Report, IMF highlights notably the following:
Recommendations on Banking Regulation and Supervision
Increasing the frequency of on-site inspections of systemic institutions’ subsidiaries
CSSF / ECB
Monitoring ability of banks to absorb a real estate market price decline
CSSF / ECB
Harmonising data reporting standards for loan-to-value and debt-to-income ratios
Within 1 year
Increasing the intensity of supervision over intra-group exposures, with banks required to demonstrate continued eligibility in their use of large exposure limit waiver
Recommendations on Investment Fund Regulation and Supervision
Strengthening guidance on "substance presence" in the context of delegated activities and actively engaging with regulators in jurisdictions where such activities are prominent
1 to 3 years
Issuing guidance on the holdings (limits) of directorships of funds and their managers
1 to 3 years
Assessing whether safeguards to ensure depositary independence (under UCITS V) are adequate
1 to 3 years
Providing industry guidance on liquidity stress test modalities and liquidity management tools for investment funds, and developing internal liquidity stress testing capacity
1 to 3 years
The Luxembourg Report is available here.
As Luxembourg shall undergo financial stability assessments under the FSAP every five years, the next Luxembourg FSAP report should be published in 2022.
CRS - Production and pre-validation platforms introduced in Luxembourg
Since the Luxembourg Tax Authorities of Direct Contributions ("LTA") relay the data transmitted to foreign competent authority, a Common Reporting Standard ("CRS") report will need to be filed electronically with the LTA by 30 June of each year by every Reportable Financial Institution ("FI") that has Reportable Account.
On 24 December 2015, a law implementing CRS in Luxembourg law has been enacted (the "CRS Law", available here). CRS Law transposes into Luxembourg national law the Council Directive 2014/107/UE of 9 December 2014, amending Directive 2011/16/EU regarding the mandatory exchange of information in the field of taxation ("DAC 2"). DAC 2 provides that EU Member States require their financial institutions to implement reporting and due diligence rules consistent with those set out in the CRS developed by the Organisation for Economic Co-operation and Development ("OECD"). Further details regarding the application of CRS Law are provided in the ECHA 4 Circular (available here).
Much like FATCA’s provisions, CRS imposes obligations on financial institutions to review and collect information on their clients/investors in an effort to identify their tax residence and to provide certain specified account information to the relevant foreign tax authorities on an annual basis.
On 25 April 2017, LTA released a newsletter introducing pre-validation platform and a production platform (the "Newsletter"). Financial institutions impacted by the CRS have to make sure that end-to-end test with the LTA are executed through the pre-validation environment.
Two secured channels are proposed to the financial institutions by two economic actors:
- Fundsquare via their product "e-File";
- Six Payment Services via their product "SOFiE".
The Newsletter is available here (in French only).
The CRS pre-validation and production (TEST) platforms are available as from 24 April 2017.
CRS - New facility to disclose CRS avoidance schemes
On 24 December 2015, a law implementing the CRS in Luxembourg law has been enacted (the "CRS law"). The CRS law transposes into Luxembourg national law the Council Directive 2014/107/UE of 9 December 2014, amending Directive 2011/16/EU regarding the mandatory exchange of information in the field of taxation ("DAC 2). The DAC 2 provides that EU Member States require their financial institutions to implement reporting and due diligence rules consistent with those set out in the CRS developed by the Organization for Economic Co-operation and Development ("OECD").
Much like FATCA’s provisions, the CRS imposes obligations on Financial Institutions to review and collect information on their clients/investors in an effort to identify their tax residence and to provide certain specified account information to the relevant foreign tax authorities on an annual basis.
On 5 May 2017, the OECD launched a disclosure facility on the Automatic Exchange Portal which allows interested parties to report potential schemes to circumvent the CRS (the "Facility").
This new instrument comes along with a reinforced network as an additional 500 bilateral automatic exchange relationships have been established between over 60 jurisdictions committed to exchanging information automatically pursuant to the CRS, starting in 2017.
The Facility can be accessed through the Automatic Exchange Portal and is available here.
100 jurisdictions have agreed to start automatically exchanging financial account information as of 2017 or 2018. All 2017 jurisdictions and most of 2018 jurisdictions have already established their bilateral automatic exchange relationships. In July 2017, an additional activation round will take place in order to allow the remaining jurisdictions to nominate the partners with which they will undertake automatic exchanges.