INVESTMENT SERVICES & CAPITAL MARKETS
MiFID II/MiFIR
Draft Guidelines and Regulatory Standards on common procedures and methodologies for the Supervisory Review and Evaluation Process (SREP) under the IFD/IFR.
On 18 November 2021, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) launched two public consultations on draft Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) and on draft Regulatory Technical Standards (RTS) on the additional own funds requirements that could be determined by competent authorities for investment firms.
The Draft Regulatory Technical Standards on Pillar 2 add-ons for investment firms which have been developed based on the Article 40(6) of IFD, propose indicative qualitative metrics to support competent authorities in the identification, assessment, and quantification of material risks or elements of risks that investment firms face or pose to others, that are not covered or not sufficiently covered by own funds requirements set out in Article 11 of the Investment Firms Regulation (IFR). These draft standards should be read together with the SREP guidelines.
The Draft Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) under IFD are addressed to competent authorities and promote common practices for the SREP pursuant to Article 45(2) of IFD. The common SREP framework introduced in these guidelines is built around four main elements: a) business model analysis; b) assessment of internal governance and investment firm-wide control arrangements; c) assessment of risks to capital and adequacy of capital to cover these risks; and d) assessment of risks to liquidity and funding and adequacy of liquidity resources to cover these risks. These guidelines make a link between ongoing supervision, as addressed in Directive (EU) 2019/2034, and the gone concern, by determining whether the investment firm is ‘failing or likely to fail’.
Both consultations are based on the Investment Firms Directive (IFD) and are being consulted on till 18 February 2022. Once the Guidelines and the RTS will enter into force, they will apply to competent authorities across the EU.
ESMA updates its Q&A on investor protection and intermediaries topics
On 19 November 2021, ESMA updated its Q&A on investor protection and intermediaries topics with a new Q&A setting out the considerations manufacturers and distributors should take into account when specifying the target market category for CoCo-Bond Funds.
Review of MIFIR and MIFID
On 25 November 2021, the European Commission published legislative proposals for amendments to MIFIR and MIFID II.
The stated objective is to make adjustments to the trading rules to ensure more transparency for all parties trading on capital markets. Thus, the proposed Regulation amending MIFIR seeks to enhance market data transparency, remove obstacles to the emergence of a consolidated tape, optimise the trading obligations and prohibit payments for forwarding client orders. Most of the amendments contained in the MIFID II proposal relate to the proposed changes to MIFIR.
The European Commission also published a Factsheet on the Consolidated Tape.
The Council of the European Union and the European Parliament will now consider the legislative proposal as part of the ordinary legislative process.
Market Abuse
ESMA 2020 annual report on EU market abuse sanctions
On 23 November 2021, ESMA published its annual report on administrative and criminal sanctions, as well as other administrative measures, issued across the EU under MAR in 2020.
The report found that National Competent Authorities and other authorities imposed a total of €17.5 million in fines related to 541 administrative and criminal actions under MAR. There has been an increase in the number of administrative sanctions and measures, however their financial penalties and the number and aggregated value of criminal sanctions have decreased.
CSDR
ESMA updates its Q&A
On 17 November 2021, ESMA updated its Q&As on the CSDR with two new Q&As relating to partial settlement functionality.
CSDR changes to delay mandatory buy-ins
On 24 November 2021, a tweet by Commissioner McGuinness announced that the European Parliament and Council of European Union had agreed to change the Central Securities Depositories Regulation (CSDR) to allow for a postponement of mandatory buy-ins (MBIs). This will delay MBIs beyond 1 February 2022.
ESMA announces upcoming publication aimed at CSDs
On 1 December 2021, ESMA announced that it will start publishing information on trading venues with the highest turnover for bonds. This information is needed by Central Securities Depositaries (CSDs) in order to apply cash penalties under the Central Securities Depositories Regulation (CSDR). The aim of the CSDR is to harmonise certain aspects of the settlement cycle and the settlement discipline, and to provide a set of common requirements for CSDs operating securities settlement systems across the EU.
ESMA aims to publish this data for the first time by 1 February 2022 and will update it on a quarterly basis. This will enable CSDs to access centralised and transparent information for the application of cash penalties for bonds.
EMIR
ESMA seeks input on EMIR clearing threshold framework
On 22 November 2021, ESMA published a discussion paper on EMIR clearing thresholds seeking feedback from market participants and from counterparties trading OTC derivatives.
The report aims to collect stakeholder views on the effectiveness and proportionality of the EMIR clearing thresholds and, more broadly, on the EMIR regime as a whole. It also looks at the effectiveness of the EU regime by comparing it to similar third-country regimes. ESMA’s report, based on a preliminary analysis of EMIR Trade Repository data collected before the withdrawal of the United Kingdom from the European Union, presents key metrics on financial and non-financial counterparties and the volume of OTC derivative trades captured under the current regime.
ESMA will consider the responses it receives to the discussion paper by 19 January 2022 and will continue its review with more recent data.
Crowdfunding Regulation
ESMA publishes final report on draft technical standards
On 10 November 2021, ESMA published its final report on the draft technical standards under the European crowdfunding service providers for business Regulation (Regulation (EU) 2020/1503 – the ECSPR). The draft technical standards detail rules applicable to crowdfunding service providers in relation to, inter alia:
- Authorisation by member states,
- Complaints handling,
- Conflicts of interest,
- Business continuity,
- Knowledge test and the simulation of the ability to bear loss for prospective non-sophisticated investors.
The EU commission has 3 months to decide on whether to adopt the draft technical standards.
Capital Markets Union action plan
European Commission communication
On 25 November 2021, the European Commission published a communication on the progress it has made in implementing the 2020 capital markets union (CMU) action plan and selected deliverables for 2022. This Communication accompanies the package of legislative proposals adopted by the Commission on the same day: ESAP, ELTIF II, AIFMD II and MIFID III/MIFIR III – all of which are covered in this Regulatory Updater.
The Communication covers CMU measures scheduled for 2022 including:
- a listing review to help companies raise funds on public markets: the European Commission intends to simplify the European Union’s rules and plans to adopt a legislative proposal in H2 2022
- an open finance framework – the aim of an ‘open finance framework’ is to allow data to be shared and re-used by financial institutions for creating new services, provided that customers agree to it and subject to data protection rules and clear security safeguards: the European Commission intends to present a legislative proposal and adopt a supervisory data strategy
- corporate insolvency – a harmonisation of corporate insolvency framework and procedures: the European Commission intends to propose an initiative by Q3 2022. The European Commission will propose a Directive. The exact scope of this Directive proposal will be subject to further discussions with Member States and the European Parliament.
FUND REGULATION
AIFMD and UCITS
AIFMD Review
On 25 November 2021, the European Commission published its AIFMD Review package including a proposal amending the AIFMD and the UCITS Directive on delegation, liquidity risk management, provision of depositary and custody services and loan origination.
The key areas include the depositary and custody services, delegation and substance, loan origination, liquidity management tools (LMTs), supervisory reporting regime with an overall focus for improved interaction between the AIFMD and UCITS Directive.
The proposal will follow the ordinary legislative process. The Council of the European Union and the European Parliament will now consider the legislative proposal. The European Commission proposal contemplates that member states would have 24 months after the entry into force of the amending Directive to adopt and publish the laws, regulations and administrative provisions necessary to comply.
ESMA updates Q&As on application of UCITS Directive
On 26 November 2021, ESMA published an updated version of its Q&As on the application of the UCITS Directive. A new question on fee rebate arrangements has been added to section XII (Costs and fees).
European long-term investment funds
ELTIF II
On 25 November 2021, the European Commission published its legislative proposal for a Regulation containing amendments to the Regulation on European long-term investment funds (ELTIFs).
The proposal aims to increase the uptake of ELTIFs across the EU, accelerating the acceptance and improving the attractiveness of ELTIFs as a ‘go to’ fund structure for long-term investments.
The targeted changes to the fund rules include: (a) broadening the scope of eligible assets and investments; (b) allowing more flexible fund rules that include the facilitation of fund of-fund strategies; (c) reducing the barriers preventing retail investors from accessing ELTIFs, in particular the 10 000 Euro initial investment requirement and the maximum 10% aggregate threshold requirement for those retail investors whose financial portfolios are below 500,000 Euro; (d) to ease selected fund rules for ELTIFs distributed solely to professional investors; and (e) to introduce an optional liquidity window mechanism to provide extra liquidity to ELTIF investors and newly subscribing investors without requiring a drawdown from the capital of ELTIFs.
The proposal will follow the ordinary legislative process. The Council of the European Union and the European Parliament will now consider the legislative proposal.
PRIIPS and UCITS
European Parliament adopts position on legislation extending deadline to provide a KID under PRIIPs and UCITS
On 23 November 2021, the European Parliament announced that it had voted to adopt at first reading positions on the proposed legislation amending the PRIIPs Regulation and UCITS Directive to extend the transitional arrangement exempting companies from the requirement to provide retail investors with a key information document (KID) until 31 December 2022.
The proposed amendment to the UCITS Directive also specifies that a KID should be considered as satisfying the requirements applicable to key investor information. The text also specifies that the European Commission should produce a report as a matter of urgency addressing problems in the PRIIPs Regulation including the need for a clearer definition of retail investors. The next step is for the Council of the European Union to adopt the legislative proposals.
SUSTAINABLE FINANCE
Sustainable Finance Disclosure Regulation (SFDR)
European Commission delays SFDR level 2
On 29 November 2021, ESMA published a letter dated 25 November 2021 from the European Commission to the Council of the European Union and European Parliament’s Economic and Monetary Affairs Committee on regulatory technical standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR). The European Commission announced it would defer the date of application of the delegated act to 1 January 2023 (from 1 July 2021). The European Commission specifically confirmed that financial market participants, which publish the principal adverse impact statement referred in Article 4(1)(a), 4(3) or 4(4) SFDR, will have to comply with the disclosure requirements on principal adverse impacts on sustainability matters laid down in the delegated act the first time by 30 June 2023, with the first reference period being 1 January 2022 to 31 December 2022.
DIGITAL FINANCE STRATEGY
Regulation on Markets in Crypto Assets and Digital Operational Resilience Act
On 24 November 2021, the Council of the European Union announced that it had adopted its position on the Regulation on Markets in Crypto Assets (MiCA), Digital Operational Resilience Act (DORA) and the Amending Directive accompanying the Digital Finance package proposals.
The purpose of MiCA is to create a regulatory framework for the crypto-assets market that supports innovation and draws on the potential of crypto-assets in a way that preserves financial stability and protects investors.
DORA aims to create a regulatory framework on digital operational resilience whereby all firms ensure they can withstand all types of information and communication technology (ICT) -related disruptions and threats, in order to prevent and mitigate cyber threats.
This agreement forms the Council’s negotiating mandate for trilogue negotiations with the European Parliament. The Council and the European Parliament will now enter trilogue negotiations on the proposals. Once a provisional political agreement is found between their negotiators, both institutions will formally adopt the regulations.
European Single Access Point
On 25 November 2021, the European Commission published a legislative proposal to establish a European Single Access Point (ESAP) to provide EU-wide access to information activities and products of the various categories of entities that are required to disclose such information, which is relevant to capital markets, financial services and sustainable finance.
ESAP is part of the European financial data spaces presented in the Commission’s Digital Finance Strategy published in September 2020. The Digital Finance Strategy sets out the objective that, by 2024, information disclosed to the public pursuant to EU financial services legislation should be disclosed in standardised and machine-readable formats.
The proposal comprises a Regulation establishing a ESAP, as well as a Directive and Regulation to amend various EU legislation to enable the functioning of the ESAP.
The proposed ESAP Regulation includes: (i) scope, definitions and establishment of ESAP; (ii) conditions for voluntary submission of information; (iii) list and tasks of collection bodies; (iv) cybersecurity; (v) functionalities of ESAP; (vi) access to information; (vii) tasks of ESMA; (viii) monitoring of ESAP by ESMA; and (ix) ESAP review.
CySEC DEVELOPMENTS
Amending L.164(Ι)/2021 on the capital adequacy of investment firms
On 5 November 2021, L.164(I)/2021 was published in the Official Gazette of the Republic of Cyprus, amending L.97(I)/2021 on the capital adequacy of investment firms. The amendments were adopted in order to harmonise the national law with article 62 of Directive (EU) 2019/2034 on the prudential supervision of investment firms (the “IFD”).
L.165(I)/2021 on the prudential supervision of investment firms
On 5 November 2021, L.165(I)/2021 was published in the Official Gazette of the Republic of Cyprus, regarding the prudential supervision of investment firms, for the purposes of harmonisation of the Cypriot framework with Directive (EU) 2019/2034 (the “IFD”) and for the effective implementation of the Regulation (EU) 2019/2033 (the “IFR”).
The transposition of the new prudential regulatory framework for investment firms into national law legislation sets among others the new initial capital requirements for investment firms (75K, 150k, 750K), internal governance arrangements and controls, internal capital adequacy, and risk assessment process. In the light of the above, investment firms are also called to review their remuneration policies and practices, including variable and fixed elements to ensure compliance with the new framework.
Amending L.157(Ι)/2021 of the Alternative Investment Fund Managers Law
On 5 November 2021, L.157(Ι)/2021 was published in the Official Gazette of the Republic of Cyprus, amending L.56(I)/2013 the Alternative Investment Fund Managers Law. The amending law harmonises the existing regulatory landscape with article 61 of Directive (EU) 2019/2034 on the prudential supervision of investment firms (the “IFD”).
Amending L.159(Ι)/2021 regarding the provision of investment services, the exercise of investment activities and the operation of regulated markets
On 5 November 2021, the amending L.159(Ι)/2021 was published in the Official Gazette of the Republic of Cyprus which aligns the Cypriot regulatory framework with article 64 of Directive (EU) 2019/2034 on the prudential supervision of investment firms (the “IFD”). The new framework, among others, extends the initial capital requirements for investment firms to 75K, 150k, 750K, depending on the service provided and the reporting obligations of the authorised branches of third‐country firms to CySEC. Further, the amending law introduced specifications for the provision of investment services and activities in Cyprus by third-country firms.
C475 Sanctions Imposed by the Office of Foreign Assets Control (“OFAC”) of the U.S. Treasury Department
On 11 November 2021, Circular C475 was issued by CySEC, to draw the obliged entities’ attention to the updated list for U.S. sanctions. . Even though the sanctions imposed by third countries are not enforceable in the European Union, CySEC expects obliged entities to take them into account, in the context of the Entities relevant risk assessment, and take proportionate action, including refraining from engaging with affected persons.
C476 Financial Action Task Force (FATF) Guidance on Risk-based Approach for Virtual Assets and Virtual Asset Service Providers
On 24 November 2021, Circular C476 was issued by CySEC, to inform regulated entities that the Financial Action Task Force (FATF) issued the updated Guidance 2021 for the Risk-Based Approach to Virtual Assets (VAs) and Virtual Asset Service Providers (VASPs). The updated guidance, inter alia:
- explains the applicability of FATF recommendations to VA activities and VASPs;
- provides relevant examples and types of activities covered and/or excluded by the VASP definition;
- identifies obstacles to apply mitigating measures to the dangers deriving and associated with VA activities and VASPs;
- provides examples and potential solutions to the implementation obstacles.
CySEC urges regulated entities engaging or seeking to engage in activities with virtual assets to consult the afore-mentioned Guidance in order to effectively comply with their AML/CFT obligations.
Amending L.161(I)/2021 on the macroprudential supervision of institutions
On 25 November 2021, the amending L.161(I)/2021 was published in the official Gazette of the Republic of Cyprus, amending L.6(I)/2015 regulating the macroprudential supervision of institutions and related matters and the L.93(I)/2021 on the macroprudential supervision of institutions. The amending law harmonises the existing regulatory landscape with article 62 of Directive (EU) 2019/2034 on the prudential supervision of investment firms (the “IFD”).
Directive DI 87-12 of the Cyprus Securities and Exchange Commission in relation to the supplementary supervision of Investment Firms, UCITS Management Companies or Alternative Investment Fund Managers in a Financial Conglomerate
On 26 November 2021, Directive DI 87-12 was issued by CySEC, in relation to the supplementary supervision of Investment Firms, UCITS Management Companies and Alternative Investment Fund Managers, that belong to a financial conglomerate. The Directive, inter alia, lays down the thresholds under which a group can be considered belonging to a financial conglomerate and the applicable rules in relation to the capital adequacy on a conglomerate level as well as the reporting of significant risk concentrations.