European Regulatory Updates

This article covers recent news from the European supervisory authorities.

ESMA Updates List of Trading Venues Temporarily Exempted from Open Access Under MiFIR

The European Securities and Markets Authority (ESMA) has updated the list of trading venues, which have a temporary exemption from the open access provisions under MiFIR. The updated list includes an extension of the exemption for five venues: Athens Stock Exchange (Greece), GPW (Poland), MEFF (Spain), Nasdaq Stockholm (Sweden) and OMIP (Portugal) until 4 January 2023. 

The full statement can be read here.

ESMA Updates Q&As on MIFID II and MIFIR Transparency

The European Securities and Markets Authority (ESMA) has updated its Q&As regarding transparency issues under the Markets in Financial Instruments Directive (MiFID II) and Regulation (MiFIR).

The updated Q&As provide technical clarifications for the performance of the mandatory systematic internalize (SI) test. They also specify how the number of transactions and the nominal amount traded of a derivative shall be allocated in cases where a derivative contract changes over the observation period from one sub-class to another.

ESMA will continue to develop Q&As in the coming months and will review and further update them where required.

To see the updated Q&As in full, please click here. 

ESMA Consults on Guidelines on Calculation of Positions under SFTR

The European Securities and Markets Authority (ESMA) has launched a consultation following the release of draft Guidelines on the calculation of positions by Trade Repositories (TRs) under the Securities Financing Transactions Regulation (SFTR).

ESMA has said the aim of the Guidelines is to ensure consistency of position calculation across TRs, with regards to the:

• Time of calculations;
• Scope of the data used in calculations;
• Data preparation;
• Record keeping of data; and
• Calculation methodologies.

In its press release announcing the consultation, ESMA noted the importance of high-quality position data in the assessment of systemic risks to financial stability by the relevant authorities.

ESMA has also said that the proposed guidelines should ensure a consistent methodology is used under EMIR and SFTR, while still reflecting the specificities of securities financing transaction reporting.

The closing date for responses to the consultation is September 15, 2020 with ESMA aiming to finalize the proposed Guidelines and publish a final report in Q4 2020/Q1 2021.

ESMA Publishes Updates to EMIR Q&As

On July 8, 2020 the European Securities and Markets Authority (“ESMA”) updated its Q&A document on practical questions regarding data reporting issues under the European Markets Infrastructure Regulation (“EMIR”).  The aim of the Q&A is to promote common supervisory approaches and practices in the application of EMIR and addresses questions raised by market participants, competent authorities and the general public in relation to the practical application of the Regulation.

In determining the deadline for reporting under EMIR, the updated Q&A clarifies that counterparties should follow their local time and the relevant calendar of their Member State to specify the ‘working day’.  ESMA further clarifies that this applies even if the two counterparties follow different calendars and/or are located in different time zones.

Please click here for further detail.

ESMA Response to EC Consultation on a Renewed Sustainable Finance Strategy

The European Securities and Markets Authority (ESMA) has responded to the European Commission’s (EC) consultation on the renewed sustainable finance strategy, expressing their view that the future strategy should establish a robust and proportionate framework to support a more sustainable financial system.

ESMA’s Chair, Steven Maijoor, expressed the need for ESMA to ensure investor protection and stability of the financial markets during the evolution of a more sustainable financial system. Mr. Maijoor also outlined three key areas for intervention, including improving the accessibility and standardisation of sustainability data, ensuring effective regulation and supervision in newly emerging areas such as green bonds and ESG ratings, and maintaining strong international coordination and cooperation.

Highlights from ESMA’s response include ESG disclosures and the lack of a standardized disclosure regime for Issuers; ESG ratings and the need for a legally binding definition to assist comparability among providers, as well as the need for consistent requirements to ensure transparency of underlying methodologies; ESG benchmarks and the need for robust and reliable ESG benchmarks to cover the breadth of the ESG spectrum; EU green bonds and the need for supervision of the third parties verifying the standards of green bonds at a European level; and Ecolabels for retail sustainable financial products, the effects of such labelling and whether ecolabels should be broadened to encompass a wider range of financial products.

The full article can be read here.

ESAs Notify the European Commission of the Outcome of the PRIIPs Key Information Document Review

On October 16, 2019, the European Supervisory Authorities (ESAs) published a consultation paper on draft regulatory technical standards (RTS) to amend the technical rules on the presentation, content, review and revision of KID (Delegated Regulation (EU) 2017/653). The ESAs have now informed the European Commission of the outcome of the review conducted by the ESAs of the key information document (KID) for packaged retail and insurance-based investment products (PRIIPs). The letter to the European Commission can be found here.

UK Managers (AIFM) of PRIIPs (e.g. of Investment Trusts) will need to bear in mind from 1 January 2021 EU PRIIPs provisions will not, directly, apply here in the UK as the UK will no longer be subject to EU Law.  These AIFMs will need to keep an eye out for any related announcements from HMT and the FCA as to how, in this context, the current EU PRIIPs regime will apply going forward under domestic UK law.  It is well-known that the UK has not supported the EU basis of PRIIPs KIDs, which has been the subject of the highly unusual public comments by the then FCA CEO, Andrew Bailey.  Therefore, despite the inability to reach agreement in the EU, it would seem highly likely a more appropriate regime will apply here in the UK.  Duff and Phelps will provide further commentary as and when this becomes available.

ESMA Publishes the MiFID/MiFIR Annual Review Report

The European Securities and Markets Authority (ESMA) has published its MiFID/MiFIR Annual Review Report, laying down the thresholds for the quarterly liquidity criterion ‘average daily number of trades’ (ADNT) for bonds, together with the trade percentiles for determining the size specific to the financial instrument (SSTI) pre-trade thresholds for non-equity instruments, both of which are currently in the first stage of a four stage phase-in.

Following an industry consultation, and its assessment of the first stage of implementation, ESMA recommends to the European Commission (EC) that the ADNT and trade percentiles for bonds should move to the second stage of phase-in to progress towards a more transparent trading environment for bonds.

ESMA does not recommend moving to the second stage for trade percentiles for other non-equity financial instruments.

ESMA has prepared an amended version of the regulatory technical standards adjusting the thresholds for the relevant parameters, which will need to be endorsed by the EC before being subjected to a non-objection procedure by the European Parliament and European Council.

The ESMA press release can be found here and the MiFID/MiFIR Annual Review Report can be found here.

EBA and ESMA Launch Consultation to Revise Guidelines for Assessing the Suitability of Members of the Management Body

The fourth Capital Requirements Directive (2013/36/EU) and the Markets in Financial Instruments Directive II (2014/65/EU) introduced measures to remedy weaknesses identified during the financial crisis regarding the functioning and composition of the management body within credit institutions and investment firms and the qualifications of their members.

The European Banking Authority (EBA) and the European Supervisory Market Authority (ESMA) published Guidelines in 2017 to ensure when appointing members of the management body, institutions (e.g. Credit Institutions and MiFID Investment Firms) ensured that the members have the reputation, knowledge, experience and skills necessary to safeguard proper and prudent management of the institution.

The EBA and ESMA has launched a public consultation to revise the Guidelines. The review, in relation to the assessment of the suitability of members of the management body in respect of issues such as anti-money laundering risk mitigation, conflicts of interest and gender balance, reflects the amendments introduced by the fifth Capital Requirements Directive and the Investment Firms Directive (IFD), which together with the Investment Firms Regulations (IFR) make up the IFPR due to apply to MiFID Investment Firms from 26 June 2021.

The amendments to the Guidelines recognize that members of the management body should collectively have sufficient knowledge, skills and experience in relation to combating money laundering and terrorist financing.

The draft Guidelines also clarify that being a member of affiliated companies or affiliated entities does not in itself represent an obstacle for a member of the management body to acting with independence of mind.

The draft Guidelines further specify that a gender-balanced composition of the management body is of particular importance. Institutions should respect the principle of equal opportunities for any gender and take measures to improve a more gender-balanced composition of staff in management positions.

Finally, the draft Guidelines consider the new rules set out by the Investment Firms Regulation and IFD, adopted by the European Union in 2019 for the identification of the investment firms subject to the various guidelines.

The original Guidelines adopted in 2017 clarify supervisory expectations of the management body of credit institutions and investment firms in relation to:

• sufficient time commitment
• adequate collective knowledge, skills and experience
• honesty, integrity and independence of mind
• adequate human and financial resources for induction and training of members of the management body and
• diversity, which is to be considered in the selection process

Although European legislation will apply after the UK leaves the EU, these remain relevant to UK institutions because the UK is likely to take account of such things when formulating a UK, domestic, equivalent.

The consultation runs until October 31, 2020.

ESMA Recommends Priority Topics in AIFMD review

The European Securities and Markets Authority (ESMA) has written a letter to the European Commission (Commission) recommending a number of areas to be considered as part of the forthcoming review of the Alternative Investment Management Directive (AIFMD).

Annex I of the letter sets out recommendations for changes in 19 areas of the AIFMD. In many cases, these suggestions also require consideration of changes to the Undertakings for Collective Investment in Transferable Securities (UCITS) framework.

Some of the key areas of focus proposed by ESMA include:

• The harmonization of the AIFMD and UCITS regimes, particularly with regard to the liquidity, risk management and delegation requirements.
• The introduction of harmonized reporting requirements for UCITS to be aligned with those under Annex IV of the AIFMD (which ESMA also recommends for review – see below).
• Clarifications around the scope of application of MiFID rules to AIFMs and UCITS management companies performing additional MiFID activities to provide greater consistency across these regimes. ESMA also notes that the MiFIR transaction reporting provisions are not currently included in the list of MiFID provisions that apply to AIFMs and UCITS management companies performing MiFID activities.
• The provision of additional legislative clarifications with respect to the AIFMD and UCITS delegation and substance requirements. These should clarify:
  • To which extent AIFMs and UCITS management companies should be allowed to delegate functions to third party managers often based outside of the EU. ESMA believes that such delegation arrangements may increase operational risk and recommends providing further clarity on the qualitative criteria for delegation to be complemented with additional quantitative criteria or a list of core or critical functions which cannot be delegated to third parties;
  • What regulatory standards should apply to both EU and non-EU delegates;
  • How the use of secondees based in other EU Member States or outside of the EU may affect compliance with substance requirements;
  • The distinction between collective portfolio management functions from ‘supporting tasks’ which may be performed by other group entities or third parties;
  • Whether white-label service providers, i.e. AIFMs or UCITS management companies using their platform to set up funds at the initiative of a third party and delegating portfolio management to such third party, should be subject to additional requirements to manage the risk of increased conflicts of interests attached to their business model;

• Proposed changes to the gross notional exposure method for calculating leverage to align it to the IOSCO recommendations issued in December 2019, as well as targeted changes to the commitment method calculations;
• Changes to the AIFMD Annex IV reporting regime and data use which are outlined in detail in Annex II of the ESMA letter;
• The review of the external valuer liability provisions;
• Clarifying the definition of reverse solicitation under the AIFMD.

Other areas for review recommended by ESMA include the availability of liquidity management tools for firms, the introduction of a depositary passport, the harmonization of supervision of cross-border entities, the introduction of a specific framework for loan origination funds and the definitions of professional investor and of AIF under the AIFMD.

The Commission is expected to publish a consultation paper in the coming months following its report on the review of the AIFMD which was issued in June 2020. It is unclear at this stage which ESMA recommendations will be taken on-board by the Commission and included in its consultation paper.

With regard to the UK, it is also unclear whether the FCA and HMT will make any changes to the UK AIFMD regime in the areas identified by ESMA after the end of the UK withdrawal transition period at the end of 2020.

The full ESMA letter can be found here.