INVESTMENT SERVICES & CAPITAL MARKETS
MIFID and MIFIR
ESMA updates Q&As on MIFID II and MIFIR market structure topics
On 13 October 2023, ESMA updated its Q&As on MIFID II and MIFIR market structure topics.
ESMA has added two new Q&As in relation to access to CCPs and trading venues (TVs): (i) on the extent to which a TV can apply different fee schedules to CCPs under Article 36 of MIFIR; and (ii) under what circumstances a TV can charge new fees to a CCP that has already been granted access.
Final compromise texts on proposals to improve MIFID II market data access and transparency
On 18 October 2023, the Council of the EU set out final compromise texts for the legislative proposals on the: (i) Regulation on amendments to MIFIR; and (ii) Directive on amendments to MIFID II.
The amendments relate to enhancing data transparency, removing obstacles to the emergence of consolidated tapes, optimising the trading obligations and prohibiting receiving payments for forwarding client orders.
The Council of the EU has also confirmed that its Permanent Representatives Committee has endorsed the final compromised texts. Provided the European Parliament adopts the acts in the form agreed, the Council of the EU will then proceed to adopt the acts.
ESAs suspends the decision by ESMA to withdraw the recognition decision of Dubai Commodities Clearing Corporation as a Tier 1 third-country central counterparties
On 23 October 2023, the Joint Board of Appeal (“the Board”) of the European Supervisory Authorities (“ESAs”) decided that the application for suspension brought by Dubai Commodities Clearing Corporation (“DCCC”) against ESMA is admissible and suspends the ESMA Decision.
The application was brought in relation to ESMA’s Decision, adopted under Article 25p Regulation (EU) No 648/2012 (EMIR), to withdraw the recognition of DCCC as a Tier 1 third-country central counterparties (CCP) as a consequence of the United Arab Emirates (UAE) being included in the list of high-risk third countries provided for in the Commission Delegated Regulation (EU) 2016/1675 (delegated regulation under the Fourth Money Laundering Directive which identifies in an annex the list of high-risk third countries with strategic anti-money laundering (AML) and counter-terrorist financing (CTF) deficiencies that pose significant threats to the financial system of the EU).
DCCC challenged ESMA’s Decision, asking the Board to extend the adaptation period and to suspend the withdrawal Decision until the outcome of the appeal is concluded. The Board finds that the appeal case is admissible and suspends the ESMA Decision.
ESMA updates Q&As on MIFID II and MIFIR transparency topics
On 27 October 2023, ESMA updated its Q&As on MIFID II and MIFIR transparency topics to delete a Q&A on the minimum size of orders held in an order management facility for non-equity financial instruments. The amended RTS 2, which has applied since 5 June 2023, provides for this requirement.
Markets in Crypto-assets
ESMA publishes second consultation on crypto market rules
On 5 October 2023, ESMA published the second consultation package under MiCA. ESMA is encouraging stakeholders to provide feedback to this consultation by the 14 December 2023.
ESMA is seeking input on five sets of proposed rules, covering:
- sustainability indicators for distributed ledgers;
- disclosures of inside information;
- technical requirements for white papers;
- trade transparency measures; and
- record-keeping and business continuity requirements for crypto-asset service providers.
ESMA will publish a final report in the basis of feedback received and submit the draft technical standards to the European Commission for endorsement by 30 June 2024 at the latest.
ESMA will also publish a third consultation package with the remaining 18-month mandates in Q1 of 2024.
ESMA encourages preparations for a smooth transition to MiCA
On 17 October 2023, ESMA published a letter to encourage preparations for a smooth transition to MiCA.
In the letter addressed to the Economic and Financial Affairs Council (ECOFIN), ESMA Chair, Verena Ross, calls on Member States to designate without delay the competent authorities responsible for carrying out the functions and duties provided for under MiCA, and to consider limiting the optional grand-fathering period to 12-months should they choose to offer it in their jurisdictions.
ESMA has also published a statement addressed to entities providing crypto-asset services and the national competent authorities that will be responsible for their supervision, which lists expectations for each from now until the end of the MiCA transitional period. The competent authorities are encouraged to dedicate resources and align their supervisory practices with those of their counterparts across the EU to begin effective supervision from day one.
Market participants are encouraged to begin planning towards a smooth transition and ensure their clients are aware of the regulatory status of their ‘grand-fathered’ crypto-asset offerings. The statement also reminds consumers of the risks associated with holding or investing in crypto-assets until and even after MiCA enters into application.
The grand-fathering period refers to the optional transitional measure under MiCA that grants Member States the ability to allow entities already providing crypto-asset services in their jurisdiction to continue providing those services from 30 December 2024 until as late as 1 July 2026 (depending on the duration chosen by Member States).
ESMA speech on being ready for the digital age
On 17 October 2023, ESMA published a speech by Verena Ross, ESMA Chair, on ESMA’s strategic initiatives in the technology and data domain.
Points of interest include:
- data-driven supervision – ESMA wishes to further strengthen its cooperation with and amongst national competent authorities (NCAs), with common tools and methodologies. It is starting two AI related projects with NCAs in relation to monitoring market abuse and using Natural Language Processing tools to scan investment funds’ public disclosures to spot potential bad practices such as greenwashing. ESMA also intends to share its Data Platform with NCAs
- MiCA and Distributed Ledger Technologies (DLT) Pilot Regime (which provides a legal framework for the issuance, trading and settlements of tokenised financial instruments) – these developments provide the opportunity to explore more efficient ways to monitor markets. ESMA has launched two studies to support NCAs: one to understand the specificities of different DLT and blockchain solutions, and another, in the context of MiCA, to explore further integrating monitoring of crypto markets at EU level. Due to MiCA specificities and the different technologies underpinning crypto markets, the method for accessing and analysing data for market monitoring differs from the current approach under MIFIR and MAR. Therefore, NCAs will not be able to rely on existing processes and a new approach should be developed for the monitoring of crypto-assets under MiCA; and
- shortening the EU settlement cycle – Ms Ross highlights two considerations that must be balanced as the work in this area develops: that EU markets remain stable and that they remain efficient and competitive globally.
EBA consults on guidelines and RTS under MiCA
On 20 October 2023, the EBA began consulting on a set of guidelines and two RTS under MiCA:
- draft RTS on the minimum content of the governance arrangements on the remuneration policy – sets out the main governance processes regarding the adoption and maintenance of the remuneration policy and the main policy’s elements that should be adopted;
- draft guidelines on the minimum content of the governance arrangements for issuers of asset-referenced tokens (ARTs) – it covers: (a) the tasks and responsibilities of the management body as well as the organisation of issuers of ARTs; (b) how issuers of ARTs should identify sources of operational risk and minimise those risks through the development of appropriate systems, controls, and procedures; (c) the arrangements to be put in place when relying on third-party entities for operating the reserve of assets, for the investment of the reserve assets, the custody of the reserve assets and, where applicable, the distribution of the ARTs to the public; and (d) the establishment of business continuity plans; and
- draft RTS on the approval process for white papers of ARTs issued by credit institutions – it covers: (1) the submission of an application for approval of a crypto-asset white paper; (2) the acknowledgment of the receipt and processing for approval of a white paper; (3) the assessment of completeness of the white paper and request of missing information to a white paper; (4) the information exchange between the competent authority and the European Central Bank (ECB) or other central bank, where applicable; (5) the assessment in the absence of the ECB’s or another central bank’s opinion and request of changes to a white paper; and (6) the approval of the white paper.
The deadline for comments for all three papers is 22 January 2024.
EBA and ESMA consult on two sets of Joint Guidelines on suitability assessments of the management body and holders of qualifying holdings under MiCA
On 20 October 2023, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published a joint Consultation Paper on two draft Joint Guidelines covering suitability assessment of members of the management body, and suitability of shareholders and members with qualifying holdings of issuers of asset referenced tokens (ARTs) and of crypto-asset service provider (CASPs).
The guidance will provide clarity and harmonisation with respect to the criteria to assess the suitability of the management body, the shareholders and members with qualifying holdings, thus reducing the risk of arbitrage in the application of the rules.
The consultation runs until 22 January 2024.
EMIR
Guidelines for reporting under EMIR
On 23 October 2023 ESMA published the Guidelines for reporting under EMIR (“the Guidelines”). These Guidelines will apply in relation to the derivatives reporting obligation as stated in Article 9 of EMIR and the TR’s obligations under Articles 78 and 81 of EMIR. The Guidelines will be applicable from 29 April 2024.
SUSTAINABLE FINANCE
Sustainable Finance Disclosure Regulation (SFDR)
European Commission speech on the SFDR
On 10 October 2023, the European Commission published a speech by Mairead McGuinness, European Commissioner for financial stability, financial services, and the capital markets union, on the SFDR.
In her speech, Ms McGuinness explains that the EU has in place the core building blocks of its sustainable finance framework, and is now monitoring how these tools are being used and where some adjustments may be necessary.
Ms McGuinness notes that sustainable finance is a relatively new area, and as such, the EU is learning by doing. The European Commission can see that there are many positives to how the SFDR is working, however there are still some problems that remain. For example, Ms McGuinness points to how the Regulation was designed in the interests of transparency, but in practice it is being used as a labelling scheme.
A further issue is how the Regulation links to other parts of the sustainable finance framework and EU financial regulation as a whole. Ms McGuinness explains that this is why the European Commission decided to launch a comprehensive assessment of the SFDR on 14 September. Stakeholders should respond to those consultations so that the European Commission can create a representative picture of how the SFDR is working in practice.
ESG rating activities
ECON draft report on the proposal for a regulation on the transparency and integrity of ESG rating activities
On 10 October 2023, the European Parliament’s Economic and Monetary Affairs Committee (ECON) published a draft report (dated 6 October 2023) on the proposal for a regulation on the transparency and integrity of ESG rating activities.
The report sets out ECON’s proposed amendments to the European Parliament’s draft legislative resolution, as well as an explanatory statement setting out its views on the proposed regulation.
Suggested amendments include: (i) making the disclosure requirements more stringent and instructive, so that it is clear at all times what types of materiality are considered and whether the rating is referring to absolute or relative performance; (ii) strengthening provisions regarding conflicts of interest and authorisation and use of ratings from third countries; and (iii) improving the reliability of ESG ratings activities.
Corporate Sustainability Reporting Directive
The European Commission adopts proposal as regards time limits for the adoption of sustainability reporting standards
On 17 October 2023, the European Commission adopted a proposal for a Decision amending the Accounting Directive as regards the time limits for the adoption of sustainability reporting standards for certain sectors and for certain third-country undertakings.
The Accounting Directive as amended by the Corporate Sustainability Reporting Directive requires in-scope companies to disclose information on a broad range of sustainability matters relevant to their businesses, which must be reported in accordance with European sustainability reporting standards (ESRS). The Accounting Directive currently sets the adoption date of the sector specific ESRS by 30 June 2024.
This proposal seeks to delay this date by two years, to allow companies to focus on the implementation of the first set of ESRS that are sector-agnostic. It also, as a result, seeks to delay the date for the ESRS to be used by certain non-EU companies by two years.
The proposed decision will enter into force on the twentieth day following its publication in the Official Journal.
Taxonomy Regulation
European Commission notices containing FAQs on technical screening criteria and sustainability disclosures under EU Taxonomy legislation
On 20 October 2023, two European Commission notices were published in the Official Journal on: (i) the interpretation and implementation of certain legal provisions of the EU Taxonomy Climate Delegated Act establishing technical screening criteria for economic activities that contribute substantially to climate change mitigation or climate change adaptation and do no significant harm to other environmental objective (C/2023/267); and (ii) the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of EU Taxonomy Regulation on the reporting of Taxonomy-eligible and Taxonomy-aligned economic activities and assets (C/2023/305).
The notices contain responses to FAQs relating to the Taxonomy Regulation.
ESMA fact-finding exercise on corporate reporting practices under the Taxonomy Regulation
On 25 October 2023, ESMA published a summary of findings from its fact-finding exercise on corporate reporting practices under the Taxonomy Regulation.
As part of its objective to coordinate European supervision and enforcement activities related to disclosures under the Taxonomy Regulation, ESMA has collected information from national enforcers with respect to the Fiscal Year 2022 non-financial statements published by European non-financial undertakings listed in regulated markets.
The focus of this fact-finding exercise was to evaluate the quality of the disclosures with which issuers have responded to the new requirements. Key findings include: (i) almost all issuers, selected by the national enforcers among those being active in four main sectors covered by the Taxonomy Climate Delegated Act, disclosed the required Taxonomy alignment KPIs; (ii) the reporting templates have generally been used, but for 30% of the sample they were either modified or not fully completed, which may impact comparability and make access to the data more difficult for users; and (iii) at least some of the mandatory qualitative information regarding the issuers’ assessment of their compliance with transparency requirements in relation to the nature of their activities, the technical screening criteria, the Do No Significant Harm criteria, and the minimum safeguards, was missing or insufficient for more than 40% of the assessed issuers. In addition, only 40% of the sample provided comments on their eligibility or alignment rates.
Going forward, ESMA may conduct further analysis on the areas of the reporting for which more clarity is necessary or for which material incorrect application has been identified.
Green Bonds
European Green Bonds: Council adopts new regulation to promote sustainable finance
On 23 October 2023, the Council adopted a regulation creating a European green bond standard. The regulation lays down uniform requirements for issuers of bonds that wish to use the designation ‘European green bond’ or ‘EuGB’ for their environmentally sustainable bonds.
Environmentally sustainable bonds are one of the main instruments for financing investments related to green technologies, energy efficiency and resource efficiency as well as sustainable transport infrastructure and research infrastructure. European green bonds will be aligned with the EU taxonomy for sustainable activities and made available to investors globally.
The regulation is a further step in implementing the EU’s strategy on financing sustainable growth and the transition to a climate-neutral, resource-efficient economy. The new standard will foster consistency and comparability in the green bond market, benefitting both issuers and investors of green bonds.
Issuers will be able to demonstrate that they are funding legitimate green projects aligned with the EU taxonomy. Investors’ confidence in green investment will be enhanced thanks to a framework that reduces the risks posed by greenwashing, ultimately stimulating capital flows into environmentally sustainable projects.
The regulation establishes a registration system and supervisory framework for external reviewers of European green bonds.
To prevent greenwashing in the green bonds market in general, the regulation also provides for some voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU.
All proceeds of European green bonds will need to be invested in economic activities that are aligned with the EU taxonomy for sustainable activities, provided the sectors concerned are already covered by it.
For those sectors not yet covered by the EU taxonomy and for certain very specific activities there will be a flexibility pocket of 15%. This is to ensure the usability of the European green bond standard from the start of its existence.
The use and the need for this flexibility pocket will be re-evaluated as Europe’s transition towards climate neutrality progresses and with the increasing number of attractive and green investment opportunities that are expected to become available in the coming years.
Next steps
The European Parliament adopted the contents of the agreement in its position on 5 October 2023. The Council adopted the regulation on 23 October 2023. It will be signed, and published in the EU’s Official Journal before entering into force 20 days later. It will start applying 12 months after its entry into force.
Corporate reporting
ESMA publishes report on disclosures of climate-related matters in financial statements
On 25 October 2023, ESMA published a report on disclosures of climate-related matters in financial statements.
The report aims to assist and to enhance the ability of issuers to provide more robust disclosures and create more consistency in how climate-related matters are accounted for in financial statements drawn up in accordance with IFRS. However, ESMA points out that the report does not set out best practices or prescribe the way in which the disclosure of climate-related matters should be made in the financial statements.
The first three sections of the report outline the background, objectives as well as scope and methodology. The report then focuses on topics for which it is likely that climate-related matters have a higher impact. In doing so, ESMA highlights, in each example, key aspects and provides insights that explain why such disclosures may be useful to users of financial statements. Finally, each section includes ESMA’s observations on areas of continued focus.
ESMA expects issuers and auditors to consider the illustrative examples of this report when considering how to assess and disclose the degree to which climate-related matters play a role into the preparation and auditing of IFRS financial statements. ESMA also stresses that the guidance addressing climate impacts is not exhaustive and is developing at a fast pace. Issuers should closely follow the developments of standard setters in this area, and their connection with sustainability reporting.
CySEC DEVELOPMENTS
Circular C601: EBA’s Guidelines on the use of Remote Customer Onboarding Solutions under Article 13(1) of Directive (EU) 2015/849
On 12 October 2023, CySEC issued Circular 601 (the “Circular”), with which informs Regulated Entities that the European Banking Authority (EBA) has published its Guidelines on the use of Remote Customer Onboarding Solutions under Article 13(1) of Directive (EU) 2015/849 (the “Guidelines”). Please note that the present Circular is a continuation of the CySEC’s Circular C479, through which CySEC informed Regulated Entities regarding the launch of a Public Consultation of EBA on new Draft Guidelines on the use of Remote Customer Onboarding Solutions.
The Guidelines set common EU standards on the development and implementation of sound, risk-sensitive initial customer due diligence (CDD) processes in the remote customer onboarding context. They set out the steps institutions should take when adopting or reviewing solutions to comply with their obligations under Article 13(1) points (a), (b) and (c) of Directive (EU) 2015/849 (the ‘AMLD’) to onboard new customers remotely.
CySEC adopted the Guidelines, under section 61(1) of the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007 as amended, which transposes Article 13(1) of the AMLD.
The Guidelines apply since 2 October 2023.
Circular C602: Requirements of the CNMV regarding the product intervention measures relating to contract for differences (the ‘CFDs’) and other leveraged products to retail investors in Spain
On 12 October 2023, CySEC issued Circular C602 (the “Circular”) to draw the attention of the Cyprus Investment Firms (the ‘CIFs’) to the CNMV’s Resolution of 11 July 2023 on product intervention measures relating to CFDs and other leveraged products to retail investors in Spain.
The CNMV’s Resolution forbids the advertisement of CFDs and other leveraged instruments to retail investors as well as certain remuneration policies and sales techniques. Moreover, intervention measures for the marketing, sale and distribution to retailers of other leveraged instruments (such as futures and options) are also established.
The measures applied from 3 August 2023 to all entities authorised to provide investment services in Spain and are related to any marketing, distribution and sale of the subject instruments and services to retail investors in Spain, regardless of the origin of the investment firm marketing and distributing such products, or whether there is or not a branch in Spain (therefore including entities under the freedom to provide services without an establishment).
Circular C603: ESMA Guidelines on MiFID II product governance requirements
On 12 October 2023, CySEC issued Circular C603 (the “Circular”), with which it wishes to inform Regulated Entities that the European Securities and Markets Authority (ESMA) published the Guidelines on MiFID II product governance requirements (the “Guidelines”) on 3 August 2023, translated in all official languages of the EU.
The Guidelines apply to firms and competent authorities in relation to the manufacturing or distribution of financial instruments and structured deposits. The purpose of the Guidelines is to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision and to ensure the common, uniform and consistent application of the MiFID II requirements on product governance, with the intention to strengthen investor protection.
CySEC has adopted the Guidelines by incorporating them into its supervisory practices and regulatory approach.
The Guidelines apply from 3 October 2023.
Circular C604: ΕΒΑ Guidelines on outsourcing (EBA/GL/2019/02)
On 13 October 2023 the CySEC issued Circular C604 (the “Circular”) to inform Cyprus Investment Firms (“CIFs”) on the European Banking Authority (“EBA”) Guidelines on Outsourcing (the “Guidelines”). The Guidelines were published on the 2nd of February 2019 by the EBA.
CySEC has adopted the Guidelines under section 29 of the Prudential Supervision of Investment Firms Law of 2021, by incorporating them into its supervisory practices and regulatory approach.
These Guidelines apply to CIFs that fall under sections 9(1), (3) and (4) of the Prudential Supervision of Investment Firms Law of 2021, i.e., with initial capital requirement of €150.000 and €750.000.
The Guidelines also specify the internal governance arrangements, including sound risk management that CIFs should implement when they outsource functions, in particular regarding the outsourcing of critical or important functions. For more information, please refer to the Circular and the Guidelines.
CIFs must review and amend accordingly any existing outsourcing arrangements ensuring these are in compliance with the Guidelines, by 30 June 2024.
CIFs are also required to complete the documentation (section 11 of the Guidelines) of all existing outsourcing arrangements, other than those for outsourcing arrangements to cloud service providers, in line with the Guidelines following the first renewal date of each existing outsourcing arrangement by no later than 30 June 2024.