INVESTMENT SERVICES & CAPITAL MARKETS
MiFID/MiFIR
ESMA publishes its annual report on waivers and deferrals
On 16 December 2021, published its Annual Report on waivers and deferrals for equity and non-equity instruments covering the year 2020.
The report includes an analysis based on waivers for which ESMA issued an opinion to the competent authority. It also provides an overview on the use of waivers and the application of the deferral regime in the European Economic Area (EEA) for trade transparency under MiFIR. Overall, ESMA observed no major change in market microstructure and waivers and deferrals regimes remain an integral part of the EEA market structure, specifically for exchange-traded funds (ETFs) and the bond market.
The large in scale waiver is the most used and shares and ETFS are the instrument type for which waivers are requested most frequently. Consistent with 2019, ETFs are the instruments with the highest percentage of “dark” trading with respect to the overall volume traded in those instruments.
The application of the discretionary deferral regime across all non-equity instruments by competent authorities continues resulting in a patchwork of national approaches across the EEA.
The withdrawal of the United Kingdom (UK) from the EU at the end of 2020 meant that this was a transitional year, and in order to take a forward-looking approach ESMA did not include UK data for 2020 in the report. Wherever possible, a comparison with the UK and with last year’s findings were included in the report, to reflect the UK’s impact on EEA markets prior to Brexit.
ESMA will submit this report to the European Commission and will publish a similar report in the second half of 2022, covering the application of the waivers and deferral regime in 2021.
ESMA publishes guidance on appropriateness and execution-only requirements under MIFID II
On 3 January 2022, ESMA published the final report on its Guidelines on certain aspects of the MiFID II appropriateness and execution-only requirements.
These requirements constitute an important element of investor protection in the provision of investment services other than investment advice or portfolio management. Under MiFID II, investment firms providing non-advised services are required to request information on the knowledge and experience of clients or potential clients to assess whether the investment service or product envisaged is appropriate, and to issue a warning in case the investment service or product is deemed inappropriate. The execution-only framework allows for an exemption to this assessment in certain conditions, including that the firm issues a warning to the client.
The purpose of the Guidelines is to enhance clarity and to foster convergence in the application of the appropriateness and execution-only requirements. The ESMA Common Supervisory Action (CSA) conducted in 2019 showed there was a need for such convergence in the area of appropriateness and execution-only. The Guidelines cover several important aspects of the appropriateness process, spanning from the information to be provided to clients about the purpose of the appropriateness assessment, the arrangements necessary to understand clients and products, to the matching of clients with appropriate products and the effectiveness of warnings. Moreover, other related requirements are clarified, such as the execution-only exemption and record-keeping and controls.
The Guidelines will be translated into the official languages of the EU and published on ESMA’s website. The publication of the translations will trigger a two-month period during which national competent authorities must notify ESMA whether they comply or intend to comply with the Guidelines. The Guidelines will apply six months after the date of the publication on ESMA’s website in all EU official languages.
Market Abuse
ESMA publishes guidelines on delayed disclosure under MAR
On 5 January 2022. ESMA published its Final Report on the amendment of the Market Abuse Regulation (MAR) guidelines on delayed disclosure in relation to prudential supervision. The Guidelines are adding certain cases to the list of legitimate interests of issuers for delaying public disclosure of inside information.
The Guidelines are aimed at providing clarity, enhancing legal certainty and fostering supervisory convergence and should assist issuers in conducting their assessment as to whether they meet the conditions to delay inside information in accordance with MAR.
The Guidelines also introduce clarifications on the institutions’ case-by-case assessment as to whether they would be in possession of inside information in relation to the institution-specific Supervisory Review and Evaluation Process (SREP) decisions received from their prudential competent authority, with particular reference to the Pillar 2 Capital Requirements (P2R) and Capital Guidance (P2G).
The amended Guidelines clarify the following:
- In case of redemptions, reductions and repurchases of own funds subject to supervisory authorisation, the institutions have a legitimate interest to delay the disclosure of inside information until the prudential competent authority has authorised the transactions;
- There is a legitimate interest for the institution to delay the disclosure of the draft SREP decision informally communicated to an institution, until that decision becomes final following the completion of the decision-making process of the prudential competent authority;
- In respect of the content of the SREP decisions, the P2R are expected to be considered as inside information and as highly likely to be price sensitive whereas P2G may only be inside information. Examples of situations where price sensitivity is expected are when:
- the difference between the P2G and the institution’s level of capital is not minor and is likely to involve a major reaction by the institution, such as a capital increase; and
- the institution’s P2G is not in line with market expectations, so a price impact can be expected.
This Final Report follows the publication of a Consultation Paper when ESMA proposed to provide clarifications, in the context of the interaction between the MAR transparency obligations vis-à-vis inside information and the prudential supervisory framework.
A translation procedure will follow after the publication of this Final Report. The regular comply or explain procedure will be carried out ahead of the full application of the Guidelines. The Guidelines will be applicable 2 months after the publication of translations.
CSDR
ESMA publishes a statement on the Supervisory approach on the implementation of the CSDR buy-in provisions
On 17 December 2021, ESMA published a Public Statement to clarify the practical implementation of the EU CSDR settlement discipline regime.
The CSDR settlement discipline regime is scheduled to start applying on 1 February 2022. However, the expected amendment to CSDR should allow ESMA to propose a later start date for the CSDR buy-in regime. ESMA expects National competent authorities (NCAs) not to prioritise supervisory actions in relation to the application of the buy-in regime until the provision for postponing the application of the buy-in regime is formally in place.
The application and supervision of the other CSDR settlement discipline requirements, in particular the settlement fails reporting and the cash penalties regimes, will go ahead as planned.
The Statement follows ESMA’s letter to the Commission asking the co-legislators to consider a delay of the mandatory buy-in regime, as the Commission’s legislative proposal for the CSDR Review, possibly including changes to the buy-in regime, is not expected to be published before Q1 2022.
ESMA updates its Q&A
On 17 December 2021, ESMA updated its Q&As on the CSDR, on the with two new Q&As relating to partial settlement functionality.
Distributed Ledger technology
ESMA launches call for evidence on distributed ledger technology and the need for amending MIFIR regulatory reporting and transparency requirements
On 4 January 2022, ESMA publishes a call for evidence on distributed ledger technology (DLT). The call for evidence seeks input from stakeholders on the use of DLT for trading and settlement and on the need for amending the regulatory technical standards (RTS) on regulatory reporting and transparency requirements.
The Regulation on a pilot regime for market infrastructures based on DLT (DLT Pilot) requires ESMA to assess whether the RTS developed under MIFIR relative to certain pre-and post-trade transparency and data reporting requirements need to be amended in order to be effectively applied to securities issued, traded and recorded on DLT. The areas covered in the call include:
- RTS 1 (equity transparency);
- RTS 2 (non-equity transparency);
- RTS 3 (double volume cap and provision of data); and
- RTS on data reporting requirements – i.e. RTS 22 (transaction reporting), RTS 23 (reference data), RTS 24 (order record keeping), and RTS 25 (clock synchronisation).
In addition, in relation to the transaction reporting exemption, the call for evidence seeks stakeholders’ views on possible effective ways to allow regulators’ access to information on:
- transactions;
- financial instruments’ reference data; and
- transparency data.
The aim is to ensure more efficient, secure, and cost-effective management of the data stored on DLTs while preserving its quality, usability and comparability.
Stakeholders are invited to provide comments by 4 March 2022. Based on the feedback received, ESMA will consider whether amendments to the RTS are necessary. If amendments are necessary, ESMA will consult on its proposal before submitting the final draft RTS to the European Commission for adoption. The DLT Pilot is expected to apply in early 2023.
Securities Financing Transactions Regulation (SFTR)
ESMA Q&A on data reporting
On 14 December 2021, ESMA updated its Q&A. ESMA has added a new question explaining that in the case of the Overview report, trade repositories should calculate and express the aggregate positions in securities financing transactions (SFTs) in their Euro equivalent value, irrespective of whether a position captures SFTs featuring the same or different currencies.
FINANCIAL CRIME
Anti-money laundering and countering the financing of terrorism
The EBA consults on new remote customer onboarding guidelines
On 10 December 2021, the European Banking Authority launched a consultation on its draft Guidelines on the use of remote customer onboarding solutions under the 4th Anti-money Laundering Directive (MLD4).
These Guidelines set out a common understanding by competent authorities of the steps financial sector operators should take to ensure safe and effective remote customer onboarding practices in line with applicable anti-money laundering and countering the financing of terrorism legislation and the EU’s data protection framework.
Once adopted, these Guidelines will apply to all financial sector operators that are within the scope of MLD4. This consultation runs until 10 March 2022. The EBA will finalise these guidelines once the consultation responses have been assessed. A public hearing will take place via conference call on 24 February 2022.
The EBA strengthens AML/CFT supervision in the EU through revised Guidelines and enhanced cooperation
On 16 December 2021, the European Banking Authority (EBA) published its revised Guidelines on risk-based supervision of credit and financial institutions’ compliance with anti-money laundering and countering the financing of terrorism (AML/CFT) obligations.
The Guidelines set out the steps supervisors should take to ensure adequate AML/CFT oversight of their sector and support the adoption, by credit and financial institutions, of effective ML/TF risk management policies and procedures.
The EBA decided to update and strengthen these Guidelines in light of the findings from its ongoing work to review competent authorities’ approaches to AML/CFT supervision. These findings suggest that some competent authorities found the implementation of the risk-based approach to AML/CFT supervision challenging.
The revised Guidelines build on the existing 4-step approach to the risk-based AML/CFT supervision and provide additional guidance on ML/TF risk assessments, including the sectoral risk assessment. They also help supervisors choose the most effective tools to meet their supervisory objectives, including in situations when they have identified breaches and weaknesses in institutions’ systems and controls framework and emphasise the importance of cooperation between AML/CFT supervisors and other stakeholders, including prudential supervisors, Financial Intelligence Units (FIUs) and tax authorities.
In June 2021, the European Court of Auditors called for greater consistency in the AML/CFT approach to supervision and recognised the need to publish these guidelines as a matter of priority by the end of 2021.
The EBA paves the way for setting up a central database
On 20 December 2021, the European Banking Authority (EBA) published draft Regulatory Technical Standards (RTS) on a central database on anti-money laundering and countering the financing of terrorism (AML/CFT) in the EU.
The European Reporting system for material CFT/AML weaknesses (EuReCA) will be a key tool for coordinating efforts to prevent and counter money laundering and terrorism financing (ML/TF) in the Union.
The EBA is legally required to establish and keep up to date a central AML/CFT database. This database, also known as EuReCa, will contain information on material weaknesses in individual financial institutions that make them vulnerable to ML/TF. Competent authorities across the EU will have to report such weaknesses, as well as the measures they have taken to rectify them.
The EBA’s draft RTS specify when weaknesses are material, the type of information competent authorities will have to report, how information will be collected and how the EBA will analyse and disseminate the information contained in EuReCa. They also set out the rules necessary to ensure confidentiality, protection of personal data and the effectiveness of EuReCa.
The EBA will use EuReCA to provide information on ML/TF risk affecting the EU’s financial sector. It will also share information from the database with competent authorities as appropriate, to support them at all stages of the supervisory process, and in particular if specific risks or trends emerge.
EuReCA will be an early warning tool, which will help competent authorities to act before the ML/TF risk crystalise. As such, EuReCA will be key to strengthening AML/CFT supervision and to coordinating efforts to prevent and counter ML/TF in the EU.
The EBA will submit these draft RTS to the European Commission for approval. Once approved, the RTS will be directly applicable in all Member States. EuReCA will start to receive data in Q 1 2022.
FUND REGULATION
AIFMD
ESMA updates Q&As on application of AIFMD
On 17 December 2021, ESMA updated its Q&A. It has added a new Q&A as to whether managers of undertakings investing in crypto-assets are subject to the AIFMD. ESMA states that collective investment undertakings raising capital from a number of investors to invest in crypto-assets in accordance with a defined investment policy for the benefit of those investors will qualify as an AIF.
As the AIFMD does not provide for a list of eligible or non-eligible assets, AIFs may in principle invest in any traditional or alternative assets as long as the AIFM can ensure compliance with the AIFMD. However, more specific investment and risk diversification requirements for AIFs investing in cryptoassets as well as limitations regarding the target investors of such AIFs may exist at national level.
ESMA notes that it is important to assess on a case-by-case basis and that market participants and National Competent Authorities should pay attention to the guidance provided in the ESMA guidelines on key concepts of the AIFMD. ESMA reminds market participants and investors of the high risks involved in investments in crypto-assets.
UCITS
ESMA updates Q&As on application of UCITS Directive
On 17 December 2021, ESMA updated it Q&A. ESMA has added two new questions with regards to issuer concentration: (a) on how securities issued by certain issuers (for example, sovereign issuers) under Article 54(1) are treated; and (b) where a UCITS has a hedged share class in a different currency, whether unrealised FX profits and losses should be counted towards the net asset value of the hedged share class and be taken into account when calculating the counterparty risk limit under Article 52(1); a question as to whether advance notice for the marketing of new share classes of UCITS is required where the host and home Member States have already been notified for cross-border marketing.
UCITS and AIFS
ESMA publishes letter to European Commission on reverse solicitation
On 3 January, ESMA published a letter, dated 17 December 2021, from Verena Ross, Executive Director, to John Berrigan, Director General, Directorate-General for Financial Stability, Financial Markets and Capital Markets Union, on a request for support in relation to the report on reverse solicitation.
It responded to the 24 September 2021 letter from John Berrigan to Natasha Cazenave, Executive Director, ESMA. ESMA was invited to ask National Competent Authorities (NCAs) for input on a number of questions relating to the use of reverse solicitation by asset managers and the impact on passporting activities. In the letter, ESMA:
- explains that almost all NCAs have no readily available information on the use of reverse solicitation either via asset managers or investor associations. However, a couple of NCAs provided some interesting information on the extent to which reverse solicitation is used in their jurisdiction that allows ESMA to share some anecdotal evidence of the use of reverse solicitation within the Union. Unfortunately, in the absence of quantitative information for other Member States, it is difficult at this stage to draw any conclusion for the rest of the Union;
- in an attempt to obtain information on this practice, ESMA states that the European Commission may consider contacting directly market participants such as asset managers, depositories or account holders, possibly via national and European trade associations, which may have such information and, if not, could consult their members. ESMA is of the view that using the proportion of foreign investors in funds may not be an appropriate proxy for all jurisdictions, in particular for home jurisdictions from where funds are passported significantly across the Union. One solution could be to use the proportion of foreign investors from countries where funds are not notified for cross-border marketing but this information might be difficult to obtain; and
- regarding the possible extension of the notification portal referred to in Article 13(2) of the Regulation to enable the exchange of notifications of cross-border marketing between NCAs, ESMA confirms that this extension has been proposed for prioritisation in the context of the 2022 IT ESMA budget.
PRIIPs
Delegated Regulation amending PRIIPs KID RTS published in the Official Journal
On 20 December 2021, On 20 December 2021, Commission Delegated Regulation amending the regulatory technical standards (RTS) laid down in Commission Delegated Regulation as regards the underpinning methodology and presentation of performance scenarios, the presentation of costs and the methodology for the calculation of summary cost indicators, the presentation and content of information on past performance and the presentation of costs by packaged retail and insurance-based investment products (PRIIPs) offering a range of options for investment and alignment of the transitional arrangement for PRIIP manufacturers offering units of funds referred to in Article 32 of PRIIPs Regulation as underlying investment options with the prolonged transitional arrangement laid down in that Article, was published in the Official Journal.
Among other things, the Delegated Regulation sets out:
- new methodologies underpinning the calculation of appropriate performance scenarios and a revised presentation of these scenarios, as well as standards for information on past performance that needs to be provided by some investment funds;
- revised summary cost indicators and changes to the content and presentation of information on the costs of PRIIPs;
- modified methodology underpinning the calculation of transaction costs; and
- modified rules for PRIIPs that offer a range of options for investment.
The Delegated Regulation came into force on 9 January 2022. It will apply from 1 July 2022, with the exception of Article 1, point 13 which shall apply from 1 January 2022.
ESAs updates Q&As on PRIIPs KID
On 17 December 2021, the European Supervisory Authorities updated their Q&As on the key information document (KID) requirements for packaged retail and insurance-based investment products (PRIIPs).
The new Q&As relate to: (i) the application of Article 15(2) to different holding periods; (ii) market risk assessment: product categories; (iii) performance scenarios for category 1 PRIIPs; (iv) list of costs of PRIIPs other than investment funds; and (v) presentation of “total costs”.
PRIIPS and UCITS
Amendments to PRIIPs Regulation and UCITS Directive published in the Official Journal
On 20 December 2021, Regulation (EU) 2021/2259 amending the PRIIPs Regulation as regards the extension of the transitional arrangement for management companies, investment companies and persons advising on, or selling, units of UCITS and non-UCITS, and Directive (EU) 2021/2261 amending the UCITS Directive as regards the use of key information documents (KIDs) by management companies of UCITS, were published in the Official Journal.
The legislation extends the transitional arrangement exempting companies from the requirement to provide retail investors with a KID until 31 December 2022. The amendment to the UCITS Directive also specifies that a KID should be considered as satisfying the requirements applicable to key investor information. The legislation entered into force on 21 December, the day after their publication.
SUSTAINABLE FINANCE
EU Taxonomy
Complementary Delegated Act covering certain nuclear and gas activities
On 1 January 2022, the European Commission announced that it is consulting with the Member States Expert Group on Sustainable Finance and the Platform on Sustainable Finance on a draft text of a Taxonomy Complementary Delegated Act, under the Taxonomy Regulation, covering certain gas and nuclear activities.
The European Commission considers there is a role for natural gas and nuclear as a means to facilitate the transition towards a predominantly renewable-based future. Within the Taxonomy framework, this would mean classifying these energy sources under clear and tight conditions, in particular as they contribute to the transition to climate neutrality. To ensure transparency, the European Commission will amend the Taxonomy Disclosure Delegated Act so that investors can identify if activities include gas or nuclear activities, and to what extent, so they can make an informed choice.
The Platform on Sustainable Finance and the Member States Expert Group on Sustainable Finance must be consulted on all Delegated Acts under the Taxonomy Regulation, and will have until 12 January 2022 to provide their contributions. The European Commission will then analyse their contributions and formally adopt the complementary Delegated Act in January 2022. It will be then sent to the co-legislators for their scrutiny.
EU Taxonomy Delegated Act on Article 8 disclosures published in the Official Journal
On 10 December 2021, Delegated Regulation 2021/2178 supplementing the Taxonomy Regulation by specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of the 2013 Accounting Directive (2013/34/EU) concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation was published in the Official Journal. This Regulation entered into force on 30 December 2021.
Non-financial undertakings will need to disclose:
- Taxonomy-eligibility from 1 January 2022; and
- Taxonomy-alignment from 1 January 2023.
Financial undertakings will need to disclose:
- Taxonomy-eligibility from 1 January 2022; and
- Taxonomy-alignment from 1 January 2024.
Q&A with guidance on Taxonomy-eligibility reporting
On 21 December 2021, the European Commission published a Q&A with guidance on Taxonomy-eligibility reporting.
Climate Delegated Regulation with technical screening criteria published in the Official Journal
On 9 December 2021, Commission Delegated Regulation (EU) 2021/2139 supplementing the Taxonomy Regulation by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives, was published in the Official Journal. It came into force on 1 January 2022.
DIGITAL FINANCE STRATEGY
Regulation on Markets in Crypto Assets and Digital Operational Resilience Act
On 7 December 2021, the European Parliament Union published the texts of the reports adopted by ECON on the proposed Digital Operational Resilience Act (DORA) and the Amending Directive accompanying the Digital Finance package proposals. The reports have now been tabled for EP’s first reading in plenary.
CySEC DEVELOPMENTS
Amending Directive DI87-04(C) and Policy Statement PS-02-2021 on the grandfathering of the operations of UK groups operating under the Temporary Permission Regime (the “TPR”), which have sought to establish a physical presence in Cyprus
On 14 December 2021 PS-02-2021 was published by CySEC, to notify UK Investment Firms about its amended approach regarding the TPR as this is outlined in the amended DI87-04 (C) on the provision of services by third-country firms to eligible counterparties and professional clients. The new Policy and Directive set out the conditions for UK Investment Firms that opted in the CySECs TPR.
The new policy and Directive clarify that UK Investment Firms if they have submitted by the 31st of December 2021 an application to establish a branch, a Cyprus investment firm, or acquire an established Cyprus investment firm may continue offering their services to their Cyprus established clientele until the completion of the evaluation of CySEC of their application and for a period of up to 6 months post approval till the transfer of the services to the Cyprus established branch/Investment Firm as the case may be.
Additionally, the Policy and the Directive have clarified that the UK Investment Firms that belong to a group of companies and a member of a group has submitted an application to CySEC by the 31st of December 2021 for establishing branch/new CIF authorization/acquisition of an existing CIF, also benefit from the provisions of the previous subparagraph.
C477 Suspension of redemption of UCITS and AIF units on 24 December 2021
On 15 December 2021, Circular C477 was issued by CySEC, to inform regulated entities about the suspension of redemption of UCITS and AIFs units on the 24 December(applicable only for AIFs that hold assets in transferable securities listed in regulated markets and whose net assets are calculated on a daily basis). CySEC decided that the suspension of redemption of units would safeguard the interests of unit-holders of UCITS and AIFs and the proper functioning of the market.
C478 National Risk Assessment on Money Laundering and Terrorist Financing Risks with respect to Virtual Asset and Virtual Asset Service Providers
On 21 December 2021, Circular C478 was issued by CySEC, to inform regulated entities on the results of the National Risk Assessment report (available here) focus on the Money Laundering and Terrorist Financing risks posed by Virtual Assets and Activities and Virtual Asset Service Providers, by identifying and assessing the risks that may arise in relation to the use of these new technologies. In addition, it includes recommendations and other appropriate measures in order to manage and mitigate those risks, as required by the relevant recommendations of the Financial Action Task Force (FATF).