SCANNING OCTOBER 2018

European Regulatory Watch Newsletter


Summary

EUROPE

From above
AIFMD - ESMA updates its Q&As

  • Background

    The Directive 2011/61/EU of the European Parliament and of the Council of the EU on Alternative Investment Fund Managers applies since 22 July 2013 (the "AIFMD", available here). It establishes a comprehensive framework for the authorisation, supervision and oversight of AIFMs in Europe.

    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 AIFMD (the "Delegated and Implementing Acts", available here).

    The general public and competent authorities can submit to the European Securities and Markets Authority (the "ESMA") questions on the practical application of the AIFMD and its Delegated and Implementing Acts. Since 17 February 2014, the ESMA provides responses to those questions by publishing updates to its questions and answers document on the AIFMD (ESMA34-32-352 – the "Q&A Document", available here).

    On 23 July 2018, the Q&A Document was lastly updated, by adding a new Q&A on the supervisory responsibilities of competent authorities in host EU Member States when an AIFM provides investment services through a branch established in the host EU Member State.

    What's new?

    On 4 October 2018, the ESMA updated its Q&A Document, by adding a new Q&A 5 (on page 29) clarifying the application of the AIFMD notification requirements with regard to AIFMs managing umbrella AIFs on a cross-border basis (ESMA34-32-352 – the "Updated Q&A Document").

    In particular, the ESMA highlights that "in the notification, the AIFM has to identify the umbrella AIF, as well as the name and investment strategy of its compartments, to facilitate administrative procedure in home and host Member States. Any change in the composition of an umbrella AIF that is managed on a cross-border basis has to be notified to the competent authorities pursuant to Article 33(6) of AIFMD".

    The Updated Q&A Document is available here.

    What's next?

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

  • BMR - ESMA updates its Q&As

  • Background

    The Regulation (EU) 2016/1011 of the European Parliament and the Council 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").

    On 11 July 2018, was published version 8 of the Q&A Document including 2 new questions in its Section 5 on definitions clarifying whether calculation agents should be considered to be "users of benchmarks" and whether a benchmark can be considered as "regulated-data benchmark" if a 3rd party is involved in the process of obtaining the data.

    What's new?

    On 27 September 2018, the ESMA published version 9 of the Q&A Document (ESMA70-145-11 – the "Updated Q&A Document") providing clarifications on the following:

    • Part 5 on definitions
      • Q&A 5.8 (on page 14) clarifies when financial instruments traded on a systematic internaliser are in scope of the BMR;
      • Q&A 5.9 (from page 14 to 15) clarifies when banks issuing certificates classify as "users of benchmarks";
      • Q&A 5.10 on NAV (on page 15) clarifies why NAV of investment funds qualify as input data and not as benchmarks.
    • Part 7 on authorisation, registration and endorsement
      • Q&A 7.2 (from page 18 to 19) clarifies a single application for endorsement can include family of benchmarks;
      • Q&A 7.3 (on page 19) clarifies which should be the publication language of benchmark statements.
    • Part 8 on requirements for users of benchmarks
      • Q&A 8.2 (on page 20) clarifies when the written plan to be produced by users of benchmarks should be considered "robust";
      • Q&A 8.3 (from page 20 to 21) clarifies how users should reflect written plans in the contractual relationship with clients.

    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.

  • BMR - STIBOR added to the list of critical benchmarks

  • 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 entered into force on 30 June 2016 and 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.

    In accordance with Article 20(1) of the BMR, a benchmark is considered as being a critical benchmark where it is used directly or indirectly within a combination of benchmarks as a reference for financial instruments or financial contracts or for measuring the performance of investment funds, having a total value of at least EUR 500 billion on the basis of all the range of maturities or tenors of the benchmark, where applicable.

    On 12 August 2016, the Commission implementing regulation (EU) 2016/1368 establishing a list of critical benchmarks used in financial markets was published in the OJEU (the "Regulation 2016/1368", available here). It entered into force on 13 August 2016. The Annex to the Regulation 2016/1368 specifies that the benchmark Euro Interbank Offered Rate ("EURIBOR"), administered by the European Money Markets Institute ("EMMI"), located in Brussels, shall be considered as being a critical benchmark.

    The Annex to the Regulation 2016/1368 was subsequently amended by 2 Commission implementing regulations to add the following new critical benchmarks:

    • Euro Overnight Index Average ("EONIA"), administered by the EMMI, located in Brussels (via the "Regulation 2017/1147", available here); and
    • London Interbank Offered Rate ("LIBOR"), administered by the ICE Benchmark Administration ("IBA"), located in London (via the "Regulation 2017/2446", available here).

    What's new?

    On 18 October 2018, the Commission implementing regulation (EU) 2018/1557 amending the Regulation 2016/1368 was published in the OJEU (the "Regulation 2018/1557").

    The Annex to the Regulation 2018/1557 replaces the Annex to the Regulation 2016/1368, by adding the following benchmark to the list of critical benchmarks pursuant to Article 20(1) of the BMR:

    • Stockholm Interbank Offered Rate ("STIBOR"), administered by the Swedish Bankers' Association ("Svenska Bankföreningen"), located in Stockholm.

    The Regulation 2018/1557 is available here.

    What's next?

    The Regulation 2018/1557 shall enter into force on 19 October 2018.

  • CSDR - ESMA updates its Q&As

  • Background

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

    The European Commission (the "Commission") has adopted delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in the CSDR (the "CSDR Delegated Acts", available here). They include the Commission Delegated Regulation (EU) 2018/1229 supplementing the CSDR with regard to regulatory technical standards on settlement discipline, which shall enter into force on 14 September 2020 (the "RTS on Settlement Discipline", available here).

    The general public, market participants and national competent authorities can submit to the European Securities and Markets Authority (the "ESMA") questions on the practical application of any of the CSDR requirements. The ESMA provides answers to those questions by publishing updates to its questions and answers' document on implementation of the CSDR (ESMA70-708036281 — the "Q&A Document", available here).

    On 23 March 2018, the Q&A Document was updated adding 3 new Q&A to the CSD chapter. The new Q&A related to requirements for CSD links, conduct of business rules as well as authorisation and supervision.

    What's new?

    On 27 September 2018, the ESMA updated its Q&A Document (ESMA70-708036281 – the "Updated Q&A Document") as follows:

    • Part I on general questions includes the new Q&A 4 on book entry form requirements (from page 9 to page 10). This Q&A specifies the scope and timing of application of the requirement in Article 3(2) of CSDR to dematerialise certain transferable securities when they are transferred as collateral;
    • Part II on CSD includes the new Q&A 2 on organisational requirements (general) (from page 11 to 14). This Q&A concerns the scope of the services and activities of a CSD covered by the requirements set out in Article 30 of the CSDR on outsourcing; and
    • New Chapter III includes a set of 3 Q&As (from page 25 to page 26) in relation to the RTS on Settlement Discipline. This chapter includes Q&A 1 on general matters, Q&A 2 on cash penalties (joint penalty mechanism) and Q&A 3 on cash penalties (calculation).

    The Updated Q&A Document is available here.

    What's next?

    The ESMA will continue to develop the Q&A Document in the coming months and will review and update it where required.

  • EMIR - ESMA confirmation of new harmonized deferred date of application on clearing obligations for some transactions for 2 years (21 Dec 2020) Final Report (no.6)

  • 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).

    In accordance with Article 5 of EMIR, the ESMA is mandated to develop and submit to the European Commission (the "Commission") for endorsement draft technical standards specifying:

    • The class of OTC derivatives that should be subject to the clearing obligation referred to in Article 4 of EMIR;
    • The date or dates from which the clearing takes effect, including any phase in and the counterparties to which the obligation applies; and
    • The minimum remaining maturity of the OTC derivative contracts referred to in Article 4(1)(b)(ii) of EMIR.

    In this context, there are currently 3 Commission delegated regulations in force on the clearing obligation (altogether the "Delegated Regulations"), namely:

    • Commission delegated regulation 2015/2205 (available here);
    • Commission delegated regulation 2016/592 (available here); and
    • Commission delegated regulation 2016/1178 (available here);

    Under Article 3(2) of each of the Delegated Regulations, a deferred date of application of the clearing obligation (respectively 21 December 2018, 9 May 2019 and 9 July 2019) is foreseen for intragroup transactions satisfying certain conditions and where one of the counterparties is in a third country, in the absence of the relevant equivalent decision. To date, no implementing act on equivalence on legal, supervisory and enforcement framework of third country under Article 13(2) of EMIR in respect of the clearing obligation has been adopted.

    On 30 August 2018, the ESMA closed its consultation on the clearing obligation under EMIR (ESMA70-151-1530 – the "Consultation no.6", available here). In the Consultation no. 6, the ESMA proposed to prolong the temporary exemption date by 2 years for the Commission delegated regulation (EU) 2015/2205 (i.e. until 21 December 2020).

    What's new?

    On 27 September 2018, based on the feedback received to the Consultation no. 6, the ESMA issued its final report on the clearing obligation under EMIR (ESMA70-151-1768– the "Final Report no.6").

    In the amending draft regulatory technical standards contained in the Annex III to the Final Report no.6 (the "Draft RTS"), the ESMA confirms the introduction of the new harmonised deferred date of application on clearing obligation for all 4 categories of counterparties in Article 3(2)(1) of the Delegated Regulations (i.e. 21 December 2020).

    The Final Report no.6 is available here.

    What's next?

    The Draft RTS has been submitted to the Commission for endorsement, in the form of a Commission delegated regulation (i.e. a legally binding instrument directly applicable in all EU Member States).

  • 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 to the European Securities and Markets Authority (the "ESMA") questions on the implementation and practical application of any of the EMIR requirements. The ESMA provides answers to those questions by publishing updates to its questions and answers' document on EMIR (ESMA70-1861941480-52 — the "Q&A Document", available here).

    On 12 July 2018, the Q&A Document was lastly updated in relation to general questions (funds and counterparties), OTC reporting scenario (reporting to TRs) and TR questions (legal entity identifier ("LEI") changes due to mergers and acquisitions).

    What's new?

    On 26 September 2018, the ESMA updated its Q&A Document (ESMA70-1861941480-52 – the "Updated Q&A Document") as follows:

    • Part II CCP 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.

    The Updated Q&A Document is available here.

    What's next?

    The ESMA notes that the new Part III TR Q&A 49 will apply from 26 September 2019.

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

  • MAR - ESMA updates its Q&As

  • Background

    The Regulation (EU) N0 596/2014 of the Parliament and of the Council on market abuse applies since 3 July 2016 ("MAR", available here).

    Article 17(5) of MAR states that "in order to preserve the stability of the financial system, an issuer that is a credit institution or a financial institution, may, on its own responsibility, delay the public disclosure of inside information, including information which is related to a temporary liquidity problem and, in particular, the need to receive temporary liquidity assistance from a central bank or lender of last resort, provided that all of the following conditions are met:

    (a). The disclosure of the inside information entails a risk of undermining the financial stability of the issuer and of the financial system;

    (b). It is in the public interest to delay the disclosure;

    (c). The confidentiality of that information can be ensured; and

    (d). The competent authority specified under paragraph 3 has consented to the delay on the basis that the conditions in points (a), (b) and (c) are met".

    On 23 March 2018, the ESMA lastly updated its questions and answers' document on MAR (the "Q&A v11", available here). The new Q&A5.1 referred to disclosure of inside information related to Pillar II requirements and in particular the Minimum Requirement for own funds and Eligible Liabilities ("MREL").

    What's new?

    On 1 October 2018, the ESMA updated the Q&A v11 (ESMA70-145-111 – the "Q&A v12").

    In the new Q&A5.3, 5.4 and 5.5, the ESMA clarifies the conditions laid down in points (a), (b), (c) of Article 17(5) of MAR, as follows:

    • In relation to point (a);
      • Disclosure of inside information has to entail a risk of undermining the financial stability of both the issuer and the financial system; and
      • Such disclosure would be likely performed by an institution of relevance (e.g., in terms of impact and interconnection). Credit/financial institutions ("Institutions") should consider the specific circumstances.
    • In relation to point (b);
      • In the absence of any definition of "public interest", Recital 52 of MAR provides guidance that "the wider public and economic interest in delaying disclosure outweighs the interest of the market in receiving the information which is subject to delay";
      • When assessing the public interest, the Institution should attempt to identify different entities or groups who could be directly or indirectly affected by the decision to delay the disclosure of the inside information and whose interests may be understood as a "public interest";
      • During the assessment of the "public interest", it is important to consider interests beyond the direct economic impacts and other non-financial interests of the public. All of these interests would need to be considered, and none of them should be considered in isolation; and
      • If there are divergent interests of the public, the Institutions should assess on a case-by-case basis if the prevailing "public interest(s)" is to delay the disclosure of inside information (e.g., a potential loss to investors who have made or may make an investment decision should be weighed against the adverse effect of public disclosure on other groups, such as depositors and consumers).
    • In relation to point (c);
      • Institutions are expected to assess the confidentiality of the information at the time of the notification to the National Competent Authority ("NCA"), but also how the confidentiality can be ensured during the period in which the information might be delayed; and
      • To that purpose, Institutions should consider their procedures and measures put in place to ensure such confidentiality.
    • The Institutions notifying the NCA of their intention to resort to the financial stability delay are expected to provide their assessment on the expected length of the delay and the details of expected trigger events.
    • If the NCA gives its consent to the delay further to its own assessment of the relevant conditions, the Institutions is expected (i) to inform the NCA whenever it becomes aware of a new element or event that may affect the duration of the delay, and (ii) to share with the NCA any subsequent additional information relating to the conditions for the delay;
    • Where the relevant conditions of Article 17(5) of MAR are not met, the NCA cannot consent to the delay and, according to Article 17(6) of MAR, the Institution will have to disclose the inside information immediately. In that case, the Institution will not be able to resort to the delay of disclosure under Article 17(4) of MAR.

    The Q&A v12 is available here.

    What's next?

    The ESMA will continue to develop and review its Q&A on MAR where required.

  • MiFID II/MiFIR - ESMA renews its temporary prohibition regarding binary options and contracts for differences to retail clients

  • Background

    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 ESMA 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 3 August 2018 for 3 months (the "Decision on CFDs", available here). This restriction consists of: leverage limits on opening positions; a margin close out rule on a per account basis; a negative balance protection on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standardised way.

    On 1 June 2018, the ESMA also published a 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). The Q&A was lastly updated on 30 July 2018 providing clarifications in relation to securitised derivatives and structured finance products.

    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 " 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.

    What's new?

    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 "Press Release on CFDs"). 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 28 September 2018, the ESMA also updated the Q&A, providing an answer to question 5.12 clarifying whether the ESMA's product intervention measures in relation to CFDs also apply to rolling spot forex (ESMA35-36-1262, the "Updated Q&A").

    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") and that it has been published in the OJEU as the Decision (EU) 2018/1466 renewing and amending the temporary prohibition in Decision 2018/795 on BOs (the "New Decision 2018/1466 on BOs").

    The Press Release on CFDs is available here.

    The Updated Q&A is available here.

    The Notice on BOs is available here.

    The New Decision 2018/1466 on BOs is available here.

    What's next?

    The New Decision 2018/1466 on BOs shall apply from 2 October 2018 for 3 months.

    The ESMA shall adopt the renewal of the restriction on the marketing, distribution or sale of CFDs to retail clients in the official languages of the EU in the coming weeks, following which the ESMA shall publish an official notice on its website. The renewal measure shall then be published in the OJEU and shall start to apply from 1 November 2018 for 3 months.

    The Q&A will be updated by the ESMA on an ongoing basis.

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

  • Background

    The Directive 2014/65/EU and the Regulation (EU) No 600/2014 of the European Parliament and of the Council of the EU on markets in financial instruments apply since 3 January 2018 (respectively "MiFID II" and "MiFIR", available here and 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 MiFID II and MiFIR (the "MiFID II and MiFIR Delegated and Implementing Acts", available here and here).

    The general public, market participants and competent authorities can submit to the European Securities and Markets Authority (the "ESMA") questions in relation to the MiFID II and MiFIR regime for commodity derivatives, including the position limits, position reporting, ancillary activity provisions and other aspects. Since 19 December 2016, the ESMA provides answers to those questions by publishing updates to its questions and answers' document on MiFID II and MiFIR commodity derivatives topics (ESMA70-872942901-36 – the "Q&A Document", available here).

    On 27 March 2018, the Q&A Document was lastly updated in relation to position limits and position reporting.

    What's new?

    On 2 October 2018, the ESMA updated its Q&A Document (ESMA70-872942901-36 – the "Updated Q&A Document") as follows:

    • Added new Q&A 18 (on page 24) on position limits to clarify the treatment of legacy positions on organized trading facilities;
    • Added new Q&A 22 (on page 39) on position reporting to further specify the types of firms (e.g., investment firms or credit institutions, investment funds, other financial institutions, commercial undertakings, or operators with compliance obligations under the Emissions Allowance Trading Directive) that have to submit weekly position reports; and
    • Modified Q&A 3 and Q&A 10 (respectively on pages 25 and 28) and deleted Q&A 13 (on page 29) on the ancillary activity test.

    The Updated Q&A Document is available here.

    What's next?

    The ESMA will continue to develop the Q&A Document in the coming months and will review and update it where required.

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

  • Background

    The Directive 2014/65/EU and the Regulation (EU) No 600/2014 of the European Parliament and of the Council of the EU on markets in financial instruments apply since 3 January 2018 (respectively "MiFID II" and "MiFIR", available here and 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 MiFID II and MiFIR (the "MiFID II and MiFIR Delegated and Implementing Acts", available here and here). They include, the Commission Delegated Regulation (EU) 2017/589 supplementing MiFID II with regard to regulatory technical standards specifying the organisational requirements of investment firms engaged in algorithmic trading ("RTS 6", available here).

    The general public, market participants and competent authorities can submit to the European Securities and Markets Authority (the "ESMA") questions on the practical application of MiFID II and MiFIR in relation to market structures topics. Since 18 November 2016, the ESMA provides answers to those questions by publishing updates to its questions and answers' document on MiFID II and MiFIR market structures topics (ESMA70-872942901-38 – the "Q&A Document", available here).

    On 29 May 2018, the Q&A Document was lastly updated in relation to the organised trading facilities arranging trading in strategies, which include an equity leg.

    What's new?

    On 4 October 2018, the ESMA updated its Q&A Document (ESMA70-872942901-38 – the "Updated Q&A Document") adding new Q&A as follows:

    • Part 3 on direct electronic access and algorithmic trading
      • Q&A 26 (on page 28) on market making activities and incentives to be provided during stressed market conditions;
      • Q&A 27 (on page 29) on treatment of bulk quotes for the calculation of the order to trade ratio;
      • Q&A 28 (on page 29) on scope of Article 17(6) of MiFID II on algorithmic trading and Chapter IV (Articles 24-27) of RTS 6 concerning investment firms acting as general clearing members;
    • Part 5 on multilateral and bilateral systems
      • Q&A 7 (on page 39) on arranging of transactions that are ultimately formalised on another trading venue;
      • Q&A 8 (on page 40) on registration of a segment of a multilateral trading facility as a small and medium-sized enterprises ("SME") growth market; and
      • Q&A 9 (on page 40) on maker taker schemes.

    The Updated Q&A Document is available here.

    What's next?

    The ESMA will continue to develop the Q&A Document in the coming months and will review and update it where required.

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

  • Background

    The Regulation (EU) No 600/2014 of the European Parliament (the "Parliament") and of the Council of the EU (the "Council") on markets in financial instruments applies since 3 January 2018 ("MiFIR", here).

    The European Commission (the "Commission") has adopted delegated and implementing acts to specify how competent authorities and market participants shall comply with the obligations laid down in MiFIR (the "MiFIR Delegated and Implementing Acts", available here). Those include the following regulatory technical standards ("RTS") related to MiFIR data reporting:

    • Commission delegated regulation (EU) 2017/590 with regard to RTS for the reporting of transactions to competent authorities ("RTS 22", available here);
    • Commission delegated regulation (EU) 2017/585 with regard to RTS for the data standards and formats for financial instrument reference data and technical measures in relation to arrangements to be made by the European Securities and Markets Authority (the "ESMA") and competent authorities ("RTS 23", available here); and
    • Commission delegated regulation (EU) 2017/580 with regard to RTS for the maintenance of relevant data relating to orders in financial instruments ("RTS 24", available here).

    The general public and market participants can submit to the ESMA questions on compliance with the reporting provisions of MiFIR. The ESMA provides answers to such questions by publishing updates to its dedicated questions and answers' document on MiFIR data reporting, which was initially published on 20 December 2016 (ESMA70-1861941480-56 — the "Q&A Document", available here). On 25 May 2018, the ESMA lastly updated the Q&A Document. In particular, the updates concerned RTS 22 and RTS 23 in relation to complex trades and transaction reporting.?

    What's new?

    On 26 September 2018, the ESMA updated its Q&A Document (ESMA70-1861941480-56 – the "Updated Q&A Document"), as follows:

    • Section 15 new Q&A 1 (relating to RTS 22 and RTS 23) on FX Swaps reporting (from page 22 to page 26) – It includes reference data and transaction reporting scenarios where an FX swap is reported as a single stand-alone financial instrument;
    • Section 16 new Q&A 1 and Q&A 2 (relating to RTS 22 and RTS 23) on Interest Rate Swaps reporting (from page 26 to 33) – They include reference data and transaction reporting scenarios involving Interest Rate Swaps;
    • Section 18 new Q&A 1 (relating to RTS 23) on Reference data Fields 8-11 (on page 35) – It clarifies how trading venues or systematic internalisers ("SIs") should populate Fields 8-11 in the reports submitted under Article 27 of MiFIR and Article 4 of the Market Abuse Regulation ("MAR"); and
    • The ESMA indicates that the Section 11 Q&A 1 (from page 19 to 20) on total issued nominal amount was amended with respect to Field 14 and Field 17.

    The Updated Q&A Document is available here.

    The Press Release on the Updated Q&A Document is available here.

    What's next?

    The ESMA notes that the new Q&As contained in Sections 15 and 16 should be implemented by 27 March 2019 (i.e. 6 months after its publication).

    The ESMA will continue to develop and review the Q&A Document where required.

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

  • Background

    The Directive 2014/65/EU and the Regulation (EU) No 600/2014 of the European Parliament and of the Council of the EU on markets in financial instruments apply since 3 January 2018 (respectively "MiFID II" and "MiFIR", available here and 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 MiFID II and MiFIR (the "MiFID II and MiFIR Delegated and Implementing Acts", available here and here).

    The general public, market participants and competent authorities can submit to the European Securities and Markets Authority (the "ESMA") questions in relation to the MiFID II and MiFIR transparency topics. Since 3 October 2016, the ESMA provides answers to those questions by publishing updates to its questions and answers' document on MiFID II and MiFIR transparency topics (ESMA70-872942901-35 – the "Q&A Document", available here).

    On 12 July 2018, the Q&A Document was lastly updated in relation to general Q&A on transparency topics, systematic internaliser regime, double volume cap mechanism and corporate actions.

    What's new?

    On 4 October 2018, the ESMA updated its Q&A Document (ESMA70-872942901-35 – the "Updated Q&A Document") Part 4 on non-equity transparency as follows:

    • Amending answer to existing Q&A 10 (on page 35) on default liquidity status of bonds;
    • Adding new Q&A 13 (on page 37) on classification of derivatives on derivatives for transparency purposes; and
    • Adding new Q&A 14 (on page 37) on scope of the pre-trade transparency waiver provided under Article 9(1)(c) of MiFIR on waivers for non-equity instruments.

    The Updated Q&A Document is available here.

    What's next?

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

  • MMF Regulation - ESMA consults on Draft Guidelines on stress test scenarios

  • Background

    The Regulation (EU) 2017/1131 of the European Parliament and of the Council on money market funds ("MMFs") applies since 21 July 2018 (the "MMF Regulation", available here), with transitional provisions in relation to existing UCITS and AIFs laid out in Article 44 of the MMF Regulation.

    Article 28 of the MMF Regulation obliges each MMF to have in place sound stress testing processes that allow for the identification of possible events or future changes in economic conditions, which could have unfavourable effects on the MMF. The manager of a MMF must regularly conduct stress testing for different possible scenarios, and those stress tests must be based on objective criteria and consider the effects of severe plausible scenarios. In particular, the European Securities and Markets Authority (the "ESMA") shall develop guidelines with a view to establishing common reference parameters of the stress test scenarios taking into account the following factors:

    • Hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF;
    • Hypothetical changes in the level of credit risk of the assets held in the portfolio of the MMF, including credit events and rating events;
    • Hypothetical movements of the interest rates and exchange rates;
    • Hypothetical levels of redemption;
    • Hypothetical widening or narrowing of spreads among indexes to which interest rates of portfolio securities are tied; and
    • Hypothetical macro systemic shocks affecting the economy as a whole.

    On 21 March 2018, the ESMA published the official EU translations of its 2017 guidelines on stress tests scenarios under Article 28 of the MMF Regulation (the "2017 Guidelines", available here). The 2017 Guidelines shall be updated at least every year to take into account the latest market developments.

    What's new?

    On 28 September 2018, the ESMA launched its consultation on draft guidelines on stress test scenarios under the MMF Regulation (ESMA34-49-131 – the "Consultation Paper").

    In this context, the ESMA intends to update the 2017 Guidelines to specify the related reporting template for MMFs as referred to in Article 37 of the MMF Regulation. Annex IV to the Consultation Paper contains the full text of the draft-updated guidelines.

    Stakeholders’ views are especially sought on the methodology, including the methodology itself, risk factors, data and the calculation of impact. The calibration of the stress test scenarios is not part of the consultation. Some figures are included in the Consultation Paper illustration purposes only. Therefore, the ESMA does not expect comments on those figures. However, any input from stakeholders on the way to calibrate the scenarios would be welcome.

    The Consultation Paper is available here.

    What's next?

    Comments on the Consultation Paper shall be submitted to the ESMA by 1 December 2018.

    The ESMA should finalise such Guidelines in Q1 2019.

  • LUXEMBOURG

    Blockchain - Bill 7363 modernising the circulation of securities submitted to Parliament

  • Background

    On 31 August 2001, the Luxembourg Law of 1 August 2001 on the circulation of securities was published in the Memorial A N°106 (the "2001 Law", respectively available here in French and here in English).

    The 2001 Law was significantly amended in 2005 and 2013 by the following Luxembourg laws:

    • The Law of 5 August 2005 on financial collateral arrangements (available here); and
    • The Law of 6 April 2013 on dematerialised securities (available here).

    In view of recent technological developments, the Luxembourg Government contemplates modernising the existing framework by specifying in the 2001 Law that securities may also be registered and transferred using secure electronic registration mechanisms, including those based on blockchain technologies. With regard to the operation of securities accounts in blockchain distributed ledgers, it is especially referred to the use of the "token" concept. As a digital asset stored in a blockchain, a token would represent a new type of dematerialised securities from a technological point of view. One of the properties of blockchain distributed ledgers is that all transactions are traced in the blockchain and cannot be modified once they have been locked in a block. However, from a legal point of view, the same rights that are attached to classic dematerialised securities would be attached to tokens.

    In comparison to the French regulatory framework, the Ordinance n° 2017-1674 of 8 December 2017 on the use of shared electronic registered systems for the representation and the transmission of securities entered into force on 1 July 2018 (available here only in French).

    What's new?

    On 27 September 2018, the Luxembourg Minister of Finance submitted the bill 7363 amending the 2001 Law to the Luxembourg Parliament (the "Bill 7363").

    The main purpose of the Bill 7363 is to enable financial market participants to take full advantage, in full legal certainty, of the opportunities offered by new technologies in the field of securities' circulation.

    In this context, the Bill 7363 proposes to introduce a new Article 18a in the 2001 Law focusing on the following areas:

    • For the sake of technological neutrality, the "account keeper" may use secure electronic registration mechanisms, including distributed electronic blockchain registers or databases. The account keeper may use these mechanisms to hold the securities accounts and make the relevant entries, provided that the conditions of the 2001 Law are met;
    • Transfers made by means of these new arrangements should be considered transfers between securities accounts within the meaning of the 2001 Law;
    • For reasons of legal certainty, the proposed Article 18a(1) states that the use of secure electronic registration mechanisms does not affect the fungibility of the securities (the traceability should be ensured at the level of transactions in general, but not at the level of a particular unit of tokens);
    • The proposed Article 18a(2) further specifies that the use of a secure electronic registration mechanism should have no effect (i) on the application of the 2001 Law, (ii) on the situation of securities that continue to be with the relevant account-keeper, and (iii) on the validity or enforceability of the collateral and guarantees provided in accordance with the 2005 Law.

    For further information, the Bill 7363 is available here (only in French).

    What's next?

    As a first step, the Luxembourg Conference of Presidents should order the referral of the Bill 7363 to the (new) parliamentary Finance and Budget Commission for discussion (after the general elections taking place on 14 October 2018).

  • BELGIUM

    Additional delay for registering beneficial owners in the Ultimate Beneficial Owners register (“UBO register”)

  • Background

    Following the law of 18th September 2017 on prevention of money laundering and terrorist financing and on limitation of the use of cash, a Royal Decree defining the modalities for the functioning of the UBO register, dated 30th July 2018, was published on 14th August 2018.

    What's new?

    The relevant entities are requested to identify their ultimate beneficial owners, collect the appropriate, accurate information and support them by providing relevant documents, implement internal processes to ensure any update of the UBO register within one month in case of information’s modification.

    What's next?

    Although the Royal Decree will enter into force on 31 October 2018, the relevant entities benefit an additional delay until 31st March 2019 to register their beneficial owners.

  • HONG KONG

    Securities and Futures Commission (“SFC”) Launch of Enhanced Fund Data Reporting

  • Background

    Circular dated 29 June 2018 (“Circular’) issued by the Investment Products Division to announce the launch of enhanced fund data reporting requirements for SFC-authorized funds, including Hong Kong domiciled funds, save for UCITS funds, Recognized Jurisdiction Schemes and those under mutual recognition of funds arrangements.

    Engagements with the industry before introducing the enhanced requirements.

    The collection of enhanced funds data will enhance the SFC’s ability to perform its supervisory and regulatory responsibilities:

    • Global regulatory developments on data reporting on funds
    • Key principles and recommendations issued by FSB and IOSCO

    Existing data reporting on SFC-authorized funds will remain unchanged.

    What's new?

    In addition to the existing reporting obligations, the enhanced requirements will cover periodic reporting in the following areas:

    (a) liquidity profile of the Fund’s assets with reference to the liquidity categories1;

    (b) the Fund’s subscription and redemption amounts;

    (c) the Fund’s asset allocation (with reference to a breakdown of major asset classes by country, asset quality and listing venue etc.); and

    (d) securities financing transactions2 and securities borrowing transactions of the Fund
    (including information on outstanding balances, counterparties, collateral issuers and types etc.).

    Fund data required to be submitted under the enhanced reporting requirements is set out in full in the reporting forms.

    What's next?

    The implementation timeline with effect from 30 September 2018 is:

    Types of report Reporting frequencies First report date First filing deadline to the SFC
    Liquidity profile of Funds’ assets Quarterly 30 September 2018 5 November 2018
    Subscription and Redemption Quarterly 30 September 2018 5 November 2018
    Asset allocation Quarterly 31 December 2018 4 February 2019
    Securities financing transactions and securities borrowing transactions Annual 31 December 2018 4 February 2019

    After the first filing, the subsequent filing deadline for each type of report is 5 weeks from the report date. For quarterly reporting, the quarter end report date is 31 March, 30 June, 30 September and 31 December. For annual reporting, the year end report date is 31 December.

    Click here to download the document

    (1) As set out in the Circular to management companies of SFC-authorized funds on liquidity risk management dated 4 July 2016, management companies may classify the fund’s assets into different liquidity categories of high, medium and low liquidity.
    (2) Securities financing transactions refer to securities lending, repos and reverse repos transactions.

  • Mutual Recognition of Funds (MRF) between the United Kingdom (UK) and Hong Kong

  • Background

    The Securities and Futures Commission (SFC) and the Financial Conduct Authority (FCA) signed a Memorandum of Understanding concerning Mutual Recognition of Covered Funds and Covered Management Companies and related cooperation (Memorandum) on 8 October 2018.

    What's new?

    Scope: Mutual recognition of funds, which will allow eligible United Kingdom (UK) retail funds and Hong Kong public funds to be distributed in each other’s market through a streamlined process.

    Objectives: (i) Expand market for asset management industry and (ii) Offer investors with more investment choices.

    What's next?

    MRF operates on the following general principles:

    1. The fund must meet the eligibility requirements;
    2. The fund must remain authorized by the relevant authority in the home jurisdiction and be allowed for public offering within the home jurisdiction;
    3. The fund must operate and be managed in accordance with the relevant laws and regulations in the home jurisdiction and its constitutive documents;
    4. The sale and distribution of the fund in the host jurisdiction must comply with the applicable laws and regulations in the host jurisdiction;
    5. The fund and the management company must comply with the additional rules required by the relevant authority in the host jurisdiction governing the authorisation or recognition of the fund, including post-authorisation or recognition requirements, and the sale and distribution of the fund in the host jurisdiction; and
    6. Investors of the fund must be treated fairly; there must be no arrangements which provide an advantage for investors in the home jurisdiction, and vice versa;
    7. Post sale ongoing disclosure of information on the fund must be made available to investors in the home jurisdiction and host jurisdiction at the same time (so far as is reasonably practicable given the different time zones).

    An eligible fund complying with the relevant laws and regulations in the home jurisdiction will enjoy a streamlined authorization process for public offering in the host jurisdiction.

    Additional requirements are set out in the FCA Circular and SFC Circular.

    Click here to download the document

  • Amendments to the (1) AML/CFT Guideline and (2) Prevention of Money Laundering and Terrorist Financing Guideline issued by the SFC effective 1 November 2018

  • Background

    On 5 July 2018, the Securities and Futures Commission (SFC) issued a consultation paper which proposed a range of amendments to the Guideline on Anti-Money Laundering and Counter- Financing of Terrorism (AML/CFT Guideline) with a view to:

    (a) ensuring that it keeps in line with the latest international anti-money laundering and counter-financing of terrorism (AML/CFT) standards; and

    (b) improving the usefulness and relevance of the AML/CFT Guideline in light of industry developments and feedback from stakeholders about the AML/CFT process.

    The public was invited to comment by 9 August 2018.

    What's new?

    The amendments in AML Guideline are effective on 1 November 2018 and aim notably :

    (a) - To keep in line with the latest FATF standards:

    • Domestic and international organisation PEPs;
    • Group-wide AML/CFT systems;
    • ML/TF risks that may arise from the use of new technologies;
    • Tipping-off;
    • Record-keeping.

    (b)- To facilitate compliance

    • Identity verification of natural and legal persons under the risk-based approach;
    • Persons purporting to act on behalf of the customer;
    • Supplementary measures on customers who are not physically present for identification purposes;

    Beneficial owners of a legal person.

    What's next?

    In finalising the Revised AML/CFT Guideline attached to the conclusions paper, the SFC has worked closely with fellow AMLO regulators to ensure consistency among the respective guidelines. Any differences between the finalised revised guideline and the revised guidelines issued by fellow AMLO regulators are sectoral variations warranted by sector-specific risk characteristics and operating environments. Where necessary, the SFC will issue circulars or FAQs to provide further guidance to licensed corporations to ensure the proper application of these sector-specific requirements.

    The SFC considers that the clarifications relating to AML/CFT provided in the conclusions paper and the modifications to the AML/CFT Guideline should be adequate to facilitate compliance with the regulatory requirements. The SFC will monitor the industry’s implementation of these revised and clarified guidelines and where appropriate engage with the industry in developing FAQs to help them understand the requirements.

    The Final Form of the Revised AML/CFT Guideline and the Final Form of the Revised Guideline for AEs was published on  gazettal on 19 October 2018 and is effective since 1 November 2018.

    For other publications and information sources regarding anti-money laundering and counter-financing of terrorism, please click here.

    https://www.sfc.hk/edistributionWeb/gateway/EN/consultation/conclusion?refNo=18CP6

  • TAX UPDATES

    CRS - Residence/Citizenship by investment schemes

  • Background

    The Organisation for Economic Co-operation and Development ("OECD") has developed the Common Reporting Standard ("CRS") as a global reporting standard to achieve a comprehensive and multilateral automatic exchange of information ("AEoI") framework, which impacts a wide variety of financial and non-financial institutions.

    CRS imposes obligations on financial institutions to collect information to establish their customers’ country of tax residence and to report account holder information to their local tax authorities who will then exchange this information with the tax authorities of countries where the account holder is resident.

    In addition, more and more jurisdictions are offering "Residence by Investment" ("RBI") or "Citizenship by Investment" ("CBI") schemes, which allow foreign individuals to obtain citizenship or residence rights in exchange for local investments or against a flat fee.

    On 19 February 2018, the OECD released a Consultation Document for "Preventing Abuse of residence by investment schemes to circumvent the CRS". Public input was sought both to obtain further evidence on the misuse of CBI/RBI schemes and on effective ways for preventing such abuse. Interested parties were invited to send their contribution by 19 March 2018 at the latest.

    What's new?

    On 16 October 2018, the OECD published the results of its analysis of over 100 CBI/RBI schemes offered by CRS-committed jurisdictions, identifying those schemes that potentially pose a high-risk to the integrity of CRS (the "Analysis").

    Together with the results of the Analysis, the OECD is also publishing practical guidance that will enable financial institutions to identify and prevent cases of CRS avoidance through the use of such schemes.

    The Analysis is available here.

    What's next?

    Going forward, the OECD will work with CRS-committed jurisdictions, as well as financial institutions, to ensure that the guidance and other OECD measures remain effective in ensuring that foreign income is reported to the actual jurisdiction of residence.

  • CbCR - Luxembourg Tax Authority updates its FAQs

  • Background

    On 13 December 2016, the Luxembourg Parliament passed legislation implementing Country-by-Country Reporting ("CbCR") requirement for Luxembourg entities that are part of a Multinational Enterprise ("MNE") Group. The CbCR legislation transposes into Luxembourg law part of the three-tiered standardized approach to transfer pricing documentation introduced in Action 13 of the OECD/G20 Base Erosion and Profit Shifting ("BEPS").

    On 13 September 2018, the OECD released further guidance for tax administrations and MNE Groups on CbCR (the "Guidance", available here).

    What's new?

    On 5 October 2018, taking into account the Guidance, the Luxembourg Tax Authority updated its frequently asked questions on CbCR (the "FAQs").

    In this context, point 8. of the FAQs entitled "Instructions for the implementation of CbCR" has been updated.

    The FAQs is available here (only in French).

    What's next?

    The FAQs is not a legally binding document, but it allows entities to better understand how the CbCR rules work.

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

    Editors
    Gaëlle Kerboeuf, Group Legal Manager - Projects & Regulatory Monitoring

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

    Support
    Stefan Ullrich, Head of Legal (Germany)
    Isabella Guscetti, Legal and Compliance (Switzerland)
    Thibault Rhenter, Legal Fund Structuring (Switzerland)
    Robin Donagh, Legal Advisor (Ireland)
    Jérôme Slangen, Legal (France)
    Charles du Maisnil, Head Compliance, risk  and Legal (Belgium)
    Domitille Jeanson, Legal (Belgium)
    Jennifer Yeboah, Legal (Belgium)
    Michele Tuen, Head of Trustee and Legal (Hong Kong)

    Design
    CACEIS Group Communications

    Photos credit
    CACEIS, Adobe Stock

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