INVESTMENT SERVICES & CAPITAL MARKETS
MiFID II/MiFIR
ESMA seeks stakeholder input on shaping advice on retail investor protection
On 1 October 2021, ESMA published a call for evidence on a number of retail investor protection topics under MiFID II. These views will feed into ESMA’s technical advice to the European Commission on the development of its strategy for retail investment.
ESMA is requesting information from stakeholders on three topics:
- Disclosures: identification of any significant overlaps, gaps, redundancies and inconsistencies across investor protection legislation that might have a detrimental effect on investors. In particular, the call for evidence seeks input on how the rules work from a retail investor perspective – whether consumers can make informed choices, avoid information overload and overly complex information while ensuring investor protection;
- Digital disclosures: an assessment of how regulatory disclosures and communications can work best for consumers in the digital age, and proposes options as to how existing rules might be adapted, such as allowing layered information; and
- Digital tools and channels: an assessment of both risks and opportunities with respect to retail investing stemming from both the increasing availability of digital tools and the increasing levels of direct investor participation via online trading platforms and robo advisors. In addition, the call for evidence also explores the topic of open finance i.e. how far value chains should be opened up by sharing specific investor data amongst investment firms and third party providers.
The results of this call for evidence will be used to shape ESMA’s technical advice to assist the Commission in the development of its strategy for retail investments and to make appropriate adjustments to the legislative framework.
The call for evidence is open until 2 January 2022 and seeks feedback from all interested stakeholders. Due to its focus on investor protection issues, this paper is addressed to investors and consumer organisations, to investment firms and credit institutions performing investment services and activities and to manufacturers of PRIIPs, and to any relevant trade association. ESMA will consider the information received when drafting its advice to the Commission which will be delivered by 30 April 2022.
ESMA makes new bond liquidity data available and publishes data for the systematic internaliser calculations
On 29 October 2021, ESMA made available new data for bonds subject to the pre- and post-trade requirements of MiFID II and MiFIR through its data register.
- Bonds quarterly liquidity assessment
ESMA has published the latest quarterly liquidity assessment for bonds available for trading on EU trading venues. For this period, there are currently 448 liquid bonds subject to MiFID II transparency requirements. The transparency requirements for bonds deemed liquid will apply from 16 November 2021 to 15 February 2022.
- Data for the systematic internaliser quarterly calculations
The data which is published on 29 October 2021 on a voluntary basis covers the total number of trades and total volume over the period April to September 2021 for the purpose of the systematic internaliser (SI) calculations under MiFID II for:
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- 22,243 equity and equity-like instruments;
- 112,560 bonds; and
- 4,973 sub-classes of derivatives (including equity derivatives, interest rate derivatives, commodity derivatives, emission allowance).
The SI test shall be performed by 15 November 2021.
The results for equity and equity-like instruments and bonds are published only for instruments for which trading venues submitted data for at least 95% of all trading days over the 6-month observation period. The data publications also incorporate OTC trading to the extent it has been reported to ESMA. The publication includes data for instruments traded or available for trading during the reference period considered.
Market Abuse
RTS on cooperation arrangements with third countries under MAR published in Official Journal
On 11 October 2021, Commission Delegated Regulation (EU) 2021/1783 supplementing MAR with regard to regulatory technical standards (RTS) containing a template document for co-operation arrangements regarding the exchange of information between EU Member States’ national competent authorities and authorities in third-countries, was published in the Official Journal.
The template contains different sections that describe the scope of the co-operation, the content of the assistance to be provided, a description of the procedure as well as a description of the rules on confidentiality and the uses of information. The Delegated Regulation entered into force on 31 October 2021.
Investment recommendations made on social media
On 28 October 2021, ESMA issued a Statement on Investment Recommendations on Social Media. Following a rise in investment recommendations made on social media and a concern that retail investors are not aware of the risks associated with following such recommendations, ESMA considers that investment recommendations must be produced and disseminated in an objective and transparent way so that investors, before making any investment decision, can distinguish facts from opinions. It is also crucial that investors are able to easily identify the source of information and any conflicts of interest of those making the recommendations.
If the rules relating to investment recommendations are not adhered to, there can be fines or further supervisory actions, which in case of dissemination of false or misleading information may potentially include the referral to Public Prosecutors for market manipulation.
EMIR
Delegated Regulation specifying the criteria for establishing when an activity is to be considered to be ancillary
On 20 October 2021, the Commission Delegated Regulation (EU) 2021/1833 supplementing MiFID II (2014/65/EU) by specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level, was published in the Official Journal. The new Delegated Regulation comes into force on 9 November 2021.
EBA Draft RTS on Initial Margin Model Validation under EMIR
On 4 November 2021, the European Banking Authority (EBA) published a consultation paper on its draft Regulatory Technical Standards (RTS) on Initial Margin Model Validation (IMMV) under EMIR.
This consultation paper sets out the supervisory procedures for initial and ongoing validation of initial margin models, which will be used to determine the level of margin requirements for uncleared over the counter derivatives, as referred to in Article 11(15) EMIR. Supervisory validation will ensure harmonised supervisory procedures and an appropriately prudent approach to the level of initial margins for EU derivatives counterparts. The EBA envisages the application of supervisory procedures to both large and medium-sized counterparties by using a dual approach, proportionate to the size of the counterparty. This entails (i) a standard supervisory procedure to ensure an in-depth validation of the largest banking counterparties (Section 2 of the RTS), and (ii) a more pragmatic and simplified approach applied to smaller counterparties (Section 3 of the RTS). Additionally, these draft RTS address the issue of how to validate an IM model when this is outsourced (in terms of design or implementation) to external providers. Lastly, it is proposed that the application of the IMMV requirements is phased in with respect to the size of the counterparties and that there are transitional provisions designed to smooth the effect of the validation process.
The deadline for comments is 4 February 2022.
ESMA enforcement priorities
ESMA targets Covid-19 and climate-related disclosures
On 29 October 2021, ESMA issued its annual Public Statement on European Common Enforcement Priorities (Statement). This year’s priorities cover the impact of COVID-19 and climate-related matters, provide guidance on the measurement of expected credit losses and highlight disclosure obligations pursuant to Article 8 of the Taxonomy Regulation.
Priorities related to IFRS financial statements
The 2021 key enforcement priorities for financial statements prepared in accordance with IFRS are:
- careful assessment and transparency in accounting for longer-term impacts of the COVID-19 pandemic and the recovery phase;
- consistency between the information disclosed within the IFRS financial statements and the non-financial information concerning climate-related matters, consideration of climate risks, disclosure of any significant judgements and estimation of uncertainty regarding climate risks while clearly assessing materiality; and
- enhanced transparency regarding the measurement of Expected Credit Loss (ECL), particularly in relation to management overlays, significant changes in credit risk, forward-looking information, changes in loss allowances, credit risk exposures and collateral, and the effect of climate-related risk on ECL measurement.
Priorities related to non-financial statements
The recommendations concerning non-financial information refer to:
- impacts of COVID-19 on sustainability-related goals and non-financial key performance indicators, as well as information on any structural changes; and
- climate-related policies and their outcomes.
In addition, issuers are reminded to make the necessary preparations to fulfil the disclosure requirements foreseen by Article 8 of the Taxonomy Regulation, which will come into force as of 1 January 2022.
ESMA and national enforcers will monitor and supervise the application of the recommendations for preparing IFRS financial statements and non-financial statements as well as any other relevant provisions outlined in the Statement, with national enforcers incorporating them into their reviews and taking corrective actions where appropriate.
ESMA will collect data on how European listed entities have applied the recommendations in the Statement and will communicate its findings in its report on the enforcement activities of 2022, to be published in spring 2023.
FINANCIAL CRIME
Financial Action Task Force (FATF)
FAFT & BCBS Survey Results on cross-border payments
On 22 October 2021, the FATF published the results to its survey, run jointly with Basel Committee on Banking Supervision (BCBS), on key areas of divergence in implementing anti-money laundering and counter-terrorism financing (AML/CFT) requirements, which create frictions for cross-border payments and their potential solutions.
The survey results highlight that:
- lack of risk-based approach and inconsistent implementation of the AML/CFT requirements increases cost, reduces speed, limits access and reduces transparency;
- inconsistent national approaches cause the biggest obstacles for the private sector in: (a) identifying and verifying customers and beneficial owners; (b) sanctions screening; (c) sending and receiving customer/transaction information; and (d) establishing and maintaining correspondent banking relationships;
- key drivers of these frictions include conflicting laws and regulations. Challenges caused by varied interpretation and implementation of data protection and privacy rules and data localisation requirements also have a cross-cutting impact across the whole range of areas of divergence; and
- frictions are also caused by AML/CFT measures implemented at national levels, which are not stemming from the FATF standards. The FATF will take a holistic view on the challenges identified, including through ongoing dialogue and engagement with the private sector in order to identify potential solutions.
FATF consultation on amendments to its recommendation on transparency and beneficial ownership
On 22 October 2021, the FATF began consulting on amendments to Recommendation 24 on the transparency and beneficial ownership of legal persons. The amendments seek to reinforce the recommendation to ensure greater transparency about the beneficial ownership of legal persons, and take action to mitigate the risks. The FATF ask for views in particular in relation to:
- the multipronged approach to collection of beneficial ownership information. The FATF proposes a requirement for a public authority or body to hold beneficial ownership information. Countries would decide, on the basis of risk, context and materiality, what form of registry or alternative mechanisms they will use to enable efficient access to information by competent authorities, and should document their decision;
- bearer shares and nominee arrangements. The FATF’s questions include whether bearer shares and bearer share warrants without any traceability should be subject to additional controls and whether nominee arrangement should be subject to new disclosure requirements;
- whether countries should be required to assess the ML/TF risks of foreign-created legal persons;
- a risk-based approach to verifying beneficial ownership information; and
- requirements on access to information.
The deadline for comments is 3 December. The FATF will consider responses at its February 2022 plenary meeting.
Mitigating the Unintended Consequences of the FATF Standards
On 27 October 2021, the FATF published a high-level synopsis of a stocktake, which consolidates previous analysis of the unintended consequences resulting from incorrect implementation of the FATF standards. The report focuses on four key themes: de-risking, financial exclusion, undue targeting of non-profits (NPOs) and curtailment of human rights (focusing on due process and procedural rights).
The FATF’s findings include that:
- AML/CFT rules are not the main cause of de-risking, but can be a related factor, and AML/CFT improvements can be part of the solution, along with a proper implementation of the risk-based approach; and
- two main factors cause financial exclusion: (a) implementation issues at the country or private sector level, which leads to the misapplication of the FATF Standards, and in particular, the failure to use the proportionality that is central to the risk-based approach; and (b) the FATF’s standards, evaluation processes and other activities do not adequately encourage authorities, the private sector and assessment teams to understand the impact of financial exclusion on ML/TF risks.
FATF notes that the analysis shows it is already actively responding to unintended consequences, with a significant percentage of the FATF’s activity and attention over recent years devoted to mitigating de-risking, financial exclusion, and undue targeting of NPOs. During the next phase of this project, the FATF will identify and consider potential options to mitigate these unintended consequences.
FUND REGULATION
PRIIPS
ECON Draft Report on use of key information documents under PRIIPS Regulation and UCITS Directive
On 18 October 2021, the European Parliament’s Economic and Monetary Affairs Committee (ECON) published:
- a draft report (dated 7 October) on the proposal for a regulation amending the PRIIPs Regulation (1286/2014) as regards the extension of the transitional arrangement for management companies, investment companies and persons advising on, or selling, units of undertakings for collective investment in transferable securities (UCITS) and non-UCITS; and
- a draft report (dated 14 October) on the proposal for a Directive amending the UCITS Directive (2009/65/EC) as regards the use of key information documents (KIDs) by management companies of undertakings for collective investment in transferable securities (UCITS).
Both draft reports contain draft European Parliament legislative resolutions, which set out suggested amendments to the proposed Directive and Regulation. The European Commission adopted the proposed Regulation and Directive in July and September 2021 respectively.
ESAs invite stakeholders’ input on PRIIPS review
On 21 October 2021, the European Supervisory Authorities (ESAs) launched a call for evidence regarding the PRIIPs (Packaged retail and insurance-based investment products) Regulation.
The input provided will feed into the ESAs’ technical advice to the European Commission on a review of the key information document (KID) for PRIIPs.
The ESAs are requesting information from stakeholders on a range of topics including the practical application of the existing KID such as its use by financial advisors or the use of digital media, the scope of the PRIIPs Regulation and the degree of complexity and readability of the KID.
The call for evidence is open until 16 December 2021.
SUSTAINABLE FINANCE
Sustainable Finance Disclosure Regulation (SFDR)
ESAs propose new rules for Taxonomy-related product disclosures
On 22 October 2021, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) delivered to the European Commission their Final Report with draft Regulatory Technical Standards (RTS) regarding disclosures under SFDR as amended by the Regulation on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation). The disclosures relate to financial products that make sustainable investments contributing to environmental objectives.
The draft RTS aim to:
- provide disclosures to end investors regarding the investments of financial products in environmentally sustainable economic activities, providing them with comparable information
- establish a single rulebook for sustainability disclosures under the SFDR and the Taxonomy Regulation.
The European Commission will scrutinise the draft RTS and decide whether to endorse them within 3 months of their publication. The European Commission has informed the European Parliament and Council that it intends to incorporate all the SFDR RTS, meaning both the original ones submitted to the European Commission in February 2021 as well as the ones covered in this Final report, in one instrument.
CySEC DEVELOPMENTS
Article 138(2) of the Law which provides for the Alternative Investment Funds and other related matters (the ‘AIF Law’) – Registration in the RAIF’s register and deletion from it
On 11 October 2021, CySEC issued a reminder that any interested parties intending to register a RAIF with CySEC are obliged to apply for a RAIF registration within one month from the date of the RAIF’s registration with the Companies Registrar, as per the requirements of the AIF Law. Moreover, CySEC noted that the current legal framework does not afford the Commission the possibility to accept overdue RAIF applications.
United Nations Security Council Resolutions or Decisions (Sanctions) and the European Union Council’s Decisions and Regulations (Restrictive Measures)
On 21 October 2021, Circular C474 was issued by CySEC, to inform the Regulated Entities that section “Sanctions/Restrictive Measures” has been added on CySEC’s website under the “Regulatory Framework” section. This new section includes information and notifications regarding compliance with the provisions of the United Nations (UN) Security Council Resolutions or Decisions (“Sanctions”) and the European Union (EU) Council’s Decisions and Regulations (“Restrictive Measures”).
CySEC expects from regulated to continuously monitor the aforesaid section to ensure full compliance with the Law regarding the Prevention and Suppression of Money Laundering and Terrorist Financing as amended, as well as the directives and circulars issued pursuant to the Law.
ESMA’s Statement on Investment Recommendations on Social Media
On 29 October 2021, CySEC published an announcement to draw the attention of the public to ESMA’s statement concerning the Investment Recommendations on Social Media (the “Statement”). In this statement, ESMA explains the rules that apply to someone based in the EU, or outside when providing investment recommendations on EU financial instruments aimed at a broad audience (through analyst reports, articles, traditional media, social media etc). Such investment recommendations include inter alia suggesting explicitly or implicitly investment strategies regarding one or more financial instruments or the issuers opinions as to the present/future value of such instruments to distribution channels or the public. CySEC explains in its announcement that investment recommendations need to be specific and transparent, so that investors may assess the credibility and objectivity of such recommendations.