INVESTMENT SERVICES & CAPITAL MARKETS
Central Securities Depositary Regulation (CSDR)
European Commission adopts Delegated Regulation amending RTS on settlement fails relating to cleared transactions by CCPs
On 19 April 2023, the European Commission adopted a Delegated Regulation amending the RTS laid down in Commission Delegated Regulation (EU) 2018/1229 regarding the penalty mechanism for settlement fails relating to cleared transactions submitted by Central Counterparties (CCPs) for settlement under the CSDR.
Delegated Regulation (EU) 2018/1229 on settlement discipline (RTS on settlement discipline) details, amongst other things, the processes for the collection and distribution of cash penalties and any other possible proceeds from cash penalties.
The amendments:
- remove the separate process established in Article 19 of the RTS on settlement discipline for the collection and distribution of the cash penalties in relation to settlement fails relating to cleared transactions by CCPs. The amendments put Central Securities Depositaries (CSDs) in charge of the entire process of collection and distribution of penalties according to Articles 16, 17 and 18, in alignment with the general approach; and
- specify that in case of imbalanced positions in respect of cleared transactions the CCPs may allocate the remaining penalties’ amount, credit or debit, to their clearing members and should establish relevant mechanism in their rules to that effect. CCPs and CSDs, as well as the banking sector, expressed concerns about the duplicative process under Article 19 and how it could work in practice.
The European Parliament and the Council of the EU will now scrutinise the Delegated Regulation. If neither objects, it will enter into force 20 days after publication in the Official Journal and apply from the first business day after 12 months from the entry into force date.
EMIR, SFTR and MIFIR
ESMA finds data quality significantly improves under new monitoring approach
On 19 April 2023, ESMA published the third edition of its Data Quality Report under the European Markets Infrastructure Regulation (“EMIR”), the Securities Financing Transactions Regulation (“SFTR”) and the Markets in Financial Instruments Regulation (“MIFIR”) reporting regimes.
The report highlights the increased use of transaction data by EU financial regulatory authorities in their day-to-day supervision and identifies significant quality improvements following a new approach to data monitoring. In addition, it sets out how ESMA, together with the National Competent Authorities (“NCAs”), the European Central Bank (“ECB”) and the European Systemic Risk Board (“ESRB”), has incorporated key insights from its data monitoring in several internal workstreams.
The new framework, adopted in 2022, takes a more data-driven and outcome-focused approach to data monitoring and to collaborating with the NCAs on data quality issues under EMIR, SFTR and MIFIR.
Specifically, it consists of two new elements:
- a centralised data quality dashboard with EU-wide indicators covering the most fundamental data quality aspects under EMIR; and
- a data sharing framework that enables relevant authorities to follow up with counterparties when potentially significant data quality issues are detected.
New this year is the analysis of MIFIR transaction data from Authorized Reporting Mechanisms (ARMs) and Approved Publication Arrangements (“APAs”), following on from ESMA’s new supervisory powers over Data Reporting Services Providers (“DRSPs”).
ESMA and the NCAs will continue to work on extending the new monitoring framework beyond EMIR, MIFIR and SFTR in 2023. Both EMIR Refit and ESMA’s trade repository supervisory work are expected to lead to a significant improvement in quality of the underlying data when it enters into force in 2024.
Credit Rating Agencies Regulation
Over 140,000 EEA issuers and instruments rated by Credit ratings agencies
On 25 April 2023, ESMA published its report on the European Union (EU) Credit Ratings market, providing for the first time a cross-market view of credit ratings reported to the EU.
ESMA finds that there were 823,400 credit ratings at the end of 2022. These ratings were mostly for US-issued debt or issuers (69%), with 17% (141,600 credit ratings) on EEA30 instruments and issuers.
The main findings included in the report are:
- Size: Of the141,600 credit ratings for EEA30 instruments and issuers at the end of 2022, most were corporate ratings (79%), followed by sovereigns (12%) and structured finance ratings (9%).
- Composition: Over 90% of ratings for EEA debt and issuers had long-term horizons (a year or more), most are ratings of instruments (70%) rather than of issuers, and most were solicited by the debt issuer (73%). The largest three CRAs had issued most outstanding ratings (69%), including almost all of the ratings solicited by a debt issuer (92%).
- Credit risk trends: The COVID-19 pandemic was the most visible driver of events over the reporting period. Early in 2020 there was a marked increase in rating downgrades across asset classes, particularly for non-financial corporates and commercial mortgage-backed securities. These reflected the pressures faced in certain business sectors from the lockdowns and the associated economic uncertainties. In contrast, in late 2020 and in 2021 there was an improvement in credit risk indicators across asset classes, as government business support measures were introduced and took effect. In 2022, there were also the negative effects on credit quality of the Russian invasion of Ukraine and tightening monetary policy, though impacts here were much less pronounced and widespread than those of the pandemic.
The EU credit rating market report is based on data collected under Credit Rating Agency Regulation and provides an overview of credit rating markets in the EU, as well as risk indicators and metrics for ongoing risk monitoring related to credit ratings. Importantly, the analysis presented in the report is separate from the supervisory work ESMA conducts on CRAs and does not present indicators at an individual CRA level.
MIFID MIFIR
ESMA publishes the annual transparency calculations for non-equity instruments, bond liquidity data and quarterly SI calculations
On 28 April 2023, ESMA published the results of the annual transparency calculations for non-equity instruments, new quarterly liquidity assessment of bonds and the quarterly systematic internaliser calculations under MIFID II and MIFIR.
Third Country Central Counterparties
ESMA recognises four new third country Central Counterparties (CCPs)
On 2 May 2023, ESMA announced that it has recognised four additional third country CCPs (“TC-CCPs”) under Article 25 EMIR, bringing the total number of TC-CCPs recognised by ESMA to 39.
The newly recognised TC-CCPs are: (i) Bursa Malaysia Derivatives Clearing Berhad (Malaysia); (ii) Taiwan Futures Exchange Corporation (Taiwan); (iii) Cámara de Riesgo Central de Contraparte de Colombia S.A. (Colombia); and (iv) Tel-Aviv Stock Exchange Clearing House Ltd (Israel). The recognition of these four TC-CCPs follows the conclusion of standard MoUs between ESMA and their respective supervisory authorities.
ESMA also announces the withdrawal of recognition of six TC-CCPs established in India on 30 April.
ESMA has updated its list of recognised TC-CCPs accordingly.
FINTECH
Wire Transfer Regulation and Market in Crypto-Assets Regulation
Council of EU publishes texts of the recast Wire Transfer Regulation and the Market in Crypto-Assets Regulation
On 3 May 2023, the Council of the EU published the texts of the proposed Regulation on markets in crypto-assets (MiCA) and the Regulation on information accompanying transfers of funds and certain crypto-assets (recast revised WTR).
According to a provisional list of ‘A’ items (dated 28 April 2023), the Council of the EU plans to adopt the Regulations on 16 May 2023. The Regulations will enter into force 20 days after their publication in the Official Journal. MiCA will apply 18 months after the date of entry into force, while the recast revised WTR will apply from the date of publication.
FINANCIAL CRIME
European Parliament approves negotiating mandates on AML/CTF legislative reform package
On 19 April 2023, the European Parliament announced that it has approved negotiating mandates for its AML/CTF legislative reform package composed of the Anti-Money Laundering Authority Regulation (AMLR), the Sixth Money Laundering Directive (AMLD6) and the Anti-Money Laundering Authority (AMLA) Regulation.
Negotiations may now begin with the Council of the EU and the first meeting is due to take place at the beginning of May. On 14 April 2023, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) and Committee on Civil Liberties, Justice and Home Affairs (LIBE) published reports on two of the proposals in the EU anti-money laundering and countering the financing of terrorism (AML/CTF) legislative package: the AMLR and AMLD6. The reports set out the Committees’ adopted legislative texts, together with explanatory statements. The Committees adopted their positions on the legislative proposals on 28 March 2023.
Council of EU note on proposed Directive on cross-border law enforcement access to bank account registries
On 3 May 2023, the Council of the EU published a four-column table on the proposal for a Directive amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the single access point, comparing the Commission proposal of 20 July 2021, the amendments adopted by the European Parliament on 13 February 2023, and the mandate approved by the Permanent Representative Committee on 29 March 2023.
SUSTAINABLE FINANCE
Sustainable Finance Disclosure Regulation (SFDR)
ESAs propose amendments to extend and simplify sustainability disclosures
The ESAs, on 12 April 2023, have published a Consultation Paper with amendments to the Delegated Regulation of the Sustainable Finance Disclosure Regulation (SFDR).
The ESAs are proposing changes to the disclosure framework to address issues that have emerged since the introduction of SFDR. The authorities seek feedback on the amendments that envisage:
- extending the list of universal social indicators for the disclosure of the principal adverse impacts of investment decisions on the environment and society, such as earnings from non-cooperative tax jurisdictions or interference in the formation of trade unions;
- refining the content of other indicators for adverse impacts and their respective definitions, applicable methodologies, formulae for calculation as well as the presentation of the share of information derived directly from investee companies, sovereigns, supranationals or real estate assets; and
- adding product disclosures regarding decarbonisation targets, including intermediate targets, the level of ambition and how the target will be achieved.
Moreover, the ESAs propose further technical revisions to the SFDR Delegated Regulation by:
- improving the disclosures on how sustainable investments “do not significantly harm” the environment and society;
- simplifying pre-contractual and periodic disclosure templates for financial products; and
- making other technical adjustments concerning, among others, the treatment of derivatives, the definition of equivalent information, and provisions for financial products with underlying investment options.
The deadline for comments is 4 July 2023.
The ESAs will organise a joint public hearing and targeted consumer testing during the consultation period. After considering the comments received, the ESAs will prepare a final report and submit it to the European Commission.
European Council adopts answers to ESAs’ questions on interpretation of SFDR
On 14 April 2023, the European Commission published a Decision stating that it has adopted a set of answers to questions submitted by the ESAs relating to the application of the SFDR. In order to ensure consistency, previous answers adopted on 6 July 2021 and 13 May 2022 have also been amended.
The Q&As, set out in the Annex to the European Commission’s Decision, relate to, among other topics: (i) the interpretation of “sustainable investment”, “investment in an economic activity that contributes to an environmental objective” and “investment in an economic activity that contributes to a social objective” in Article 2(17); (ii) product design of financial products that have a reduction in carbon emissions as their Article 9(3) objective; (iii) whether financial products can “promote” carbon emissions reduction as an “environmental characteristic”, as opposed to having it as an “objective”, and therefore disclose information in accordance with Article 8; (iv) the meaning of “consider” in the disclosure obligation in Article 7(1)(a); and (v) the meaning of employee in relation to the 500 employee principal adverse impacts threshold in Article 4.
The European Commission has also published the covering letter sent to the ESAs requesting them to publish the Q&As.
CySEC DEVELOPMENTS
Circular C562: Guidance to CAIFMs and AIFs, on key principles and concepts governing the AIFMD
On 4 April 2023, CySEC issued Circular C562 through which it highlighted to Cyprus Alternative Investment Fund Managers (CAIFMs) and/or Alternative Investment Funds (AIFs) externally managed by CAIFMs, some key aspects relevant to the application of the AIFMD.
CySEC directs CAIFMs to ensure better understanding and compliance with the following, inter alia:
Single AIFM principle:
- The CAIFM is the only legal person with ultimate responsibility to manage an AIF in accordance with the CAIFM Laws.
- An externally managed AIF cannot itself perform and/or be involved in any way in the execution of functions included under Annex I of the AIFMD incorporated in the CAIFM Laws.
Principles governing the delegation of functions – “Letter Box Entity” concept:
- The abovementioned principles will be further enhanced through the upcoming AIFMD and UCITS Directive review. Thus, CAIFMs and Cyprus UCITS managers should bear in mind the relevant proposals when setting up/reviewing their delegation practices, policies and procedures in accordance with the present Circular.
- The CAIFM should ensure at all times that it does not delegate such functions, especially investment management functions, to the extent it becomes a “letter-box entity”.
- Each time a function is delegated, the sufficiency and appropriateness of human and technical resources should be assessed to ensure compliance with the principles of the delegation of functions in the AIFM Legal Framework (due diligence on delegates at selection, ongoing monitoring and supervision of delegates).
AIFMD and AIF scope:
- CAIFMs should ensure at all times that their business and/or the investment undertaking fall within the AIFMD and AIF scope elaborated under Annex 3 of the Circular.
- In order for an investment undertaking to constitute an AIF and hence fall under the scope of the AIFM Legal Framework, it must be assessed according to the ESMA Guidance on Key Concepts of the AIFMD.
Law 18(I)/2023 amending Law 87(I)/2017
On 12 April 2023, the Law 87(I)/2017 regarding the provision of investment services, the exercise of investment activities, the operation of regulated markets and other related matters, has been amended with Law 18(I)/2023 (the “Amending Law”). The Amending Law acknowledges Regulation (EU) 2022/858 on a pilot regime for market infrastructures based on distributed ledger technology (“DLT”) and amends the definition of “financial instruments” to include financial instruments issued using distributed ledger technology.
Circular C566: MOKAS Strategic Analysis Report – Financial Intelligence Information for Combating Trafficking in Human Beings
On 20 April 2023, CySEC issued Circular C566 through which it informed the Regulated Entities of the Strategic Analysis Report – Financial intelligence information for combating trafficking in human beings issued by MOKAS, which outlines red flag indicators and typologies to support all stakeholders involved, in identifying potential instances of human trafficking so that the related activity can be reported to MOKAS via Suspicious Transaction/Activity Reports (STRs and SARs).
All Regulated Entities are requested to read carefully the Report and follow and incorporate in their policies and procedures the guidance/instructions/good practices included therein.
Circular C567: Electronic Submission of the Form of the Monthly Prevention Statement for AML/CFT purposes via the CySEC’s Transaction Reporting System
On 20 April 2023, CySEC issued Circular C567 to inform all Regulated Entities about the new version of the Form of the Monthly Prevention Statement for AML/CFT which must be successfully submitted electronically via the CySEC’s Transaction Reporting System from May 2023 (reporting for April 2023) on a monthly basis, within 15 days from the end of each month.
Circular C568: Council of Europe, EU and State Revenue Service of the Republic of Latvia’s common workshop “Enhancing the effectiveness of implementation of EU sanctions by the private sector”
On 19 April 2023, CySEC issued Circular C568 through which it informed Regulated Entities of the Workshop titled “Enhancing the effectiveness of implementation of EU sanctions by the private sector”, organised by the Council of Europe and EU in cooperation with the State Revenue Service of the Republic of Latvia.
The Workshop took place on 24 April 2023 and it offered an opportunity to discuss and exchange on challenges and good practices in preventing sanction’s evasion.
Circular C570: EU Council’s Restrictive Measures against Russia due to its military aggression against Ukraine – New reporting obligations
On 28 April 2023, CySEC, further to Circular C555, issued Circular C570 through which it drew the attention of the Regulated Entities to the published FAQs by the European Commission on the new reporting obligations (updates indicated on 26/04/2023 in the consolidated FAQs, hereinafter the “FAQs”), as introduced in the 10th sanctions package against Russia following the amendments Article 8 of Council Regulation (EU) No. 269/2014 (hereinafter “Article 8”) and Article 5a of Council Regulation (EU) No. 833/2014 (hereinafter “Article 5a”), as published in the Official Journal of the European Union, dated 25 February 2023.
The FAQs address issues of the new reporting requirements:
- Under Article 8, in section B.1, regarding information held on changes to assets which took place over the two weeks prior to the designation for already existing designations on 26 April 2023 (questions 35 and 36), specifics of the information to be provided on assets frozen (question 38), specific cases of Central Securities Depositaries, specific frozen assets reporting and common reporting template (question 40).
- Under Article 5a, in section C.4, providing a template and reporting timelines (question 6) and information as to where/to whom to report on ‘immobilised’ assets (question 7).
Therefore, considering the clarifications provided above from the FAQs on the new reporting obligations, following the amendments of Article 8 and Article 5a, all affected entities were expected to inform CySEC, within the set timeframes and according to the set manner, by using the email address EU.sanctions@cysec.gov.cy.
CySEC, further reminded Regulated Entities to continuously monitor its website section “Sanctions/Restrictive Measures” as well as the EU Council’s website for guidance on the implementation of EU Council’s Restrictive Measures.
