INVESTMENT SERVICES & CAPITAL MARKETS
ESMA finds shortcomings in supervision of cross-border investment activities and issues specific recommendations to CySEC
On 10 March 2022, ESMA published its peer review report on the supervision of cross-border activities of investment firms.
With this peer review, ESMA also issued Article 16 recommendations to the Cyprus Securities and Exchange Commission (CySEC). It is the first time ESMA has issued such recommendations to a National Competent Authority (NCA).
ESMA identifies in the peer review the need for home NCAs to significantly improve their approach in the authorisation, ongoing supervision and enforcement work, relating to investment firm’s cross border activities. This includes calibrating their supervisory work to the nature, scale and complexity of those firms’ cross-border activities and the risks they pose. The peer review assessed how NCAs supervise the investment services that investment firms and credit institutions provide to retail clients on a cross-border basis using a MIFID II passport.
This exercise focused on the AFM (Netherlands), BaFin (Germany), CNB (Czech Republic), CSSF (Luxembourg), CySEC (Cyprus) and MFSA (Malta) in light of the significance of their domestic firms’ cross-border activities.
In addition to the peer review recommendations addressed to the NCAs, ESMA decided to issue two specific recommendations to CySEC under Article 16 of the ESMA Regulation requiring it to make every effort to comply. These recommendations aim to increase the human resources dedicated to the supervision of cross-border services of Cypriot investment firms,and to strengthen CySEC’s supervisory activities to effectively monitor, promote and enforce compliance by authorised firms.
Summary of findings
ESMA, based on the peer review findings, identified that home NCAs’ supervision is not sufficiently effective when it comes to their firms’ cross-border activities:
- NCAs covered by the peer review did not specifically, adequately and structurally consider firms’ cross-border activities in their supervision. In particular, NCAs did not sufficiently identify, assess and monitor the risks related to firms’ cross-border activities or take supervisory actions to effectively address those risks;
- Out of the six jurisdictions covered in the peer review, Cyprus had the highest level of outgoing cross-border activities, and by far the highest number of complaints relating to firms’ cross-border activities and of requests from other NCAs relating to Cypriot firms’ cross-border activities. A large number of Cypriot firms pose a high risk of investor detriment, due to the frequent provision of services involving speculative products, with aggressive marketing behaviour. ESMA identified that CySEC’s supervisory activities have overall proven insufficient at addressing the risks posed by Cypriot firms’ cross-border services; and
- ESMA identified that overall, home NCAs appear to have established adequate processes in relation to the passport notifications and – with some areas for improvements – in the context of cooperation.
The peer review also revealed satisfactory results on the activities carried out by host NCAs.
Next steps: ESMA expects to carry out a follow-up assessment in two years to review the level of improvements achieved considering the findings and recommendations of the peer review report.
ESMA published its assessment and recommendations on the European Commission’s MIFIR review proposal
On 15 March 2022, ESMA published its assessment of the main elements on the European Commission’s MIFIR review proposal.
The letter focuses on the establishment of the consolidated tape provider (CTP) but also includes elements such as equity and non-equity transparency, reporting and payment for order flow.
ESMA provides its technical comments on a number of topics included in the proposal and recommends to co-legislators to:
- allow for more time for running the selection process of the CTP;
- split the selection procedure from the authorisation process;
- mandate ESMA with preparing regulatory technical standards on market data to be included by the CTP instead of an EC delegated act;
- extend the timeline for triggering the assessment for ESMA to be the CTP fall-back solution;
- simplify the non-equity deferral regime as suggested in the ESMA review report on non-equity transparency;
- ensure a level-playing filed across the Union and add a stand-alone suspension mechanism for the derivatives trading obligation; and
- replace the concept of “traded on a trading venue” to avoid gaps in reporting and transparency publications.
The European Commission adopted, in November 2021, its proposal for a review of MIFIR on enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payment for forwarding client orders.
The MIFIR review proposal is currently being negotiated by the European Parliament and the Council.
ESMA final reports on review of transparency requirements under MIFIR
The reports contain targeted amendments to RTS 1 (equity transparency) and RTS 2 (non-equity-transparency) which aim to clarify, improve and simplify the transparency regime for equity and non-equity instruments. ESMA explained that these amendments address issues that have received broad support from stakeholders, or are considered important in the context of establishing a consolidated tape provider.
A second, broader review will be carried out following the ongoing MIFIR review. The second review will focus on the necessary changes to RTS 1 and 2 as a result of the MIFIR review and will include the analysis of proposals included in the consultation paper published in July 2021 but not covered in the final reports. The final reports have been submitted to the European Commission, which has three months to decide whether to endorse the proposed amendments to the RTS.
ESMA final report on guidelines on certain aspects of MIFID II remuneration requirements
On 31 March 2022, ESMA published a final report on guidelines on certain aspects of the MIFID II remuneration requirements.
The report summarises the responses to its previous consultation on the draft guidelines and explains how the responses have been taken into account. The purpose of the guidelines is to enhance clarity and foster convergence in the implementation of certain aspects of the MIFID II remuneration requirements. The guidelines will replace ESMA’s existing guidelines on the same topic, issued in 2013.
The guidelines build on the text of the 2013 guidelines. In addition, the guidelines take into account new requirements under MIFID II and the results of supervisory activities conducted by national competent authorities (NCAs) on the topic. The guidelines will apply from six months of the date of publication of the guidelines on ESMA’s website in all European Union official languages. Within two months of the date of publication of the guidelines in all European Union official languages, NCAs must notify ESMA whether they: (i) comply; (ii) do not comply, but intend to comply; or (iii) do not comply and do not intend to comply with the guidelines.
MIFIR Q&A on data reporting
On 1 April 2022, ESMA updated it Q&As on MiFIR data reporting.
EMIR and SFTR
ESMA final report on guidelines for data transfer between trade repositories under EMIR and SFTR
On 25 March 2022, ESMA published a final report on guidelines for the transfer of data between trade repositories (TRs) under EMIR and the Regulation on reporting and transparency of securities financing transactions (SFTR).
The report contains two different sets of guidelines: (i) amendments to ESMA’s existing guidelines on transfer of data between TRs under EMIR. The proposed amendments mainly propose the inclusion of a number of new guidelines which compile the additional clarifications based on the experience gathered and the on-going guidance provided by ESMA to TRs and market participants; and (ii) new guidelines on transfer of data between TRs under the SFTR. These new guidelines relate to SFTR reporting requirements in the context of porting to set up a framework to enable market participants to safely transfer data from one TR to another under the SFTR.
The report also summarises the feedback received to ESMA’s May 2021 consultation. The guidelines will be translated into all official languages of the European Union and will become applicable on 3 October 2022.
ESMA sees EMIR and SFTR data quality improve following coordinated actions
On 1 April 2022, ESMA published the second edition of its Data Quality Report based on data gathered under the European Markets Infrastructure Regulation (EMIR) and, for the first time in 2021, the Securitised Financing Transactions Regulation (SFTR) reporting regimes.
The Report presents an analysis of data quality for regulatory and supervisory use and finds that the coordinated supervisory actions by ESMA and the National Competent Authorities (NCAs) have significantly enhanced data quality in 2021.
ESMA’s analysis indicates that, despite these very positive results, certain aspects related to data reconciliation will require more efforts by reporting entities. In particular, the report suggests that data quality could be enhanced if counterparties also used the same data set and the same identifiers for the reported data in their internal risk management processes.
The report identified several prerequisites for further enhancing data quality for both trade repositories and counterparties:
- timely and complete reporting of regulatory information to the users of TR data,
- accuracy and confidentiality of data reported by counterparties to and stored by TRs, and
- accuracy of regulatory reports submitted to the users of TR data.
- Completeness and accuracy of the reported information, in particular with regards to the reporting of valuation and collateral data,
- timely submission of the reports, and
- consistency of reported information reflected in the reconciliation of data submitted by the two counterparties of the same derivative/transaction.
EMIR Data Quality
The report highlights the positive results of ESMA’s targeted actions which led to a significant reduction in reporting errors. Compared to the previous year, misreporting of valuations fell was reduced by around 50% of the reporting firms subject to the review.
ESMA carried out several projects demonstrating that the supervised Trade Repositories (TRs), to a large extent, comply with their obligations under EMIR. Despite this, the analysis identified some shortcomings in the data that were provided to the authorities which require TRs to redouble their efforts in this area.
- Reporting Timeliness – While less than 10% of reported derivatives tend to be reported late by the counterparties, more than 20% do not receive updated valuation daily, as required by EMIR.
- Reconciliation – continues to be insufficient as around 5 million of reconcilable derivatives remained unpaired.
SFTR Data Quality
2021 was the first year of the coordinated supervisory actions between ESMA and the NCAs for SFTR. For this reason, ESMA’s analysis focused on fundamental aspects of data quality, such as the timeliness of reporting, data rejection rates and pairing. Since its start on 13 July 2020, the SFTR reporting regime has shown comparable results to EMIR across all data quality metrics.
The key findings include:
- Reporting Timeliness – 10% of SFTs are reported late (after T+1);
- Rejected Data – concerns only 2% of all transactions;
- Reconciliation – the reconciliation rate of loan and collateral data has been low but has increased to around 40% and 30%, respectively.
The use of the ISO20022 XML end-to-end reporting helped ESMA and the NCAs achieve significant improvements in terms of the quality and accessibility of the data.
ESMA fines REGIS-TR €186,000 for EMIR data breaches
On 24 March 2022, ESMA fined trade repository REGIS-TR €186,000 for eight breaches under EMIR.
The breaches relate to failures in ensuring the integrity of data and providing direct and immediate access to regulators. The breaches were committed between 2017 and 2020. Five out of eight breaches were found to have resulted from negligence on the part of REGIS-TR.
REGIS-TR negligently failed to ensure the integrity of the data reported to it due to various data processing incidents, including
- not having ensured the integrity of the data reported to REGIS-TR; and
- having incorrectly rejected data correctly reported by the Reporting Parties.
Direct and immediate access
The trade repository negligently failed to provide direct and immediate access to regulators by:
- generating incorrect reports;
- failing to provide reports within the specified time limits; and
- omitting data in the reports due to wrong rejections.
ESMA also found that REGIS-TR committed three further breaches resulting in the provision of wrong and unreliable reports to regulators by failing to verify the correctness and completeness of the data received by the reporting parties.
In calculating the fine for negligent infringements, ESMA considered both aggravating and mitigating factors under EMIR.
SFTR Q&A on data reporting
On 1 April 2022, ESMA updated its (Securities Financing Transactions Regulation) SFTR Q&As on data reporting.
ESAs warn consumers on the risks of crypto-assets
On 17 March 2022, the European Supervisory Authorities issued a warning statement to consumers that many crypto-assets are highly risky and speculative. The ESAs set out key steps consumers can take to ensure they make informed decisions.
This warning comes in the context of growing consumer activity and interest in crypto-assets and the aggressive promotion of those assets and related products to the public, including through social media.
In their warning, the ESAs highlight that these assets are not suited for most retail consumers as an investment or as a means of payment or exchange, as consumers:
- face the very real possibility of losing all their invested money if they buy these assets;
- should be alert to the risks of misleading advertisements, including via social media and influencers; and
- should be particularly wary of promised fast or high returns, especially those that look too good to be true.
The ESAs also warn consumers that they should be aware of the lack of recourse or protection available to them, as crypto-assets and related products and services typically fall outside existing protection under current European Union financial services rules.
In relation to the current situation in Ukraine, and with a view to ensuring the proper implementation of the sanctions in place, the ESAs welcome the clarification by the Council of the European Union of the scope of the restrictive measures against Russian and Belarusian entities and individuals as regards crypto-assets.
Regulation on a pilot regime for market infrastructures based on distributed ledger technology
On 30 March 2022, the text of the proposed Regulation on a pilot regime for market infrastructures based on distributed ledger technology (DLT), and amending the MIFIR, CSDR and MIFID II, was published by the Council of the European Union. The European Parliament adopted the Regulation at first reading on 24 March 2022.
The Regulation lays down requirements in relation to DLT market infrastructures and their operators in respect of: (i) granting and withdrawing specific permissions to operate DLT market infrastructures in accordance with the Regulation; (ii) granting, modifying and withdrawing exemptions related to specific permissions; (iii) mandating, modifying and withdrawing the conditions attached to exemptions and in respect of mandating, modifying and withdrawing compensatory or corrective measures; (iv) operating DLT market infrastructures; (v) supervising DLT market infrastructures; and (vi) cooperation between operators of DLT market infrastructures, competent authorities and the ESAs.
The Council will now need to adopt the proposed Regulation, which will enter into force 20 days after it is published in the Official Journal and will apply nine months after the date it has entered into force (with the exception of certain articles).
ESMA coordinates regulatory response to the war in Ukraine and its impact on EU financial markets
ESMA announced on 14 March 2022 that it is in coordination with National Competent Authorities (NCAs), is closely monitoring the impact of the Ukraine crisis on financial markets and is prepared to use its relevant tools to ensure the orderly functioning of markets, financial stability and investor protection. This is part of the European Union’s overall response to the tragic consequences of Russia’s military aggression.
ESMA provides a forum for supervisors to discuss questions and coordinate responses arising from the current situation. To ensure stakeholders are adequately informed, on 14 March 2022, ESMA outlined its specific supervisory and coordination activity, as well as recommendations to financial market participants:
Supervisory and coordinating activities
- Credit Rating Agencies – ESMA continues to actively engage with CRAs to ensure sufficient transparency around ratings and is monitoring the impact of sanctions on CRAs’ operations in close cooperation with other regulators;
- Benchmarks – ESMA is engaging with its supervised benchmarks administrators to verify the impact of market developments and sanctions on the provided benchmarks. It is also engaging and coordinating with NCAs regarding the impact on benchmarks provided by the administrators under NCAs’ supervisory remit;
- Investment Management – ESMA has reinforced its coordination role by monitoring investment funds, organising frequent exchanges with NCAs to analyse market developments and supervisory risks linked to the crisis, focusing on liquidity issues and the use of liquidity management tools (LMTs) and monitoring issues relating to valuation of assets and potential suspension of redemptions;
- Secondary markets – ESMA and NCAs are monitoring the market situation, and ESMA is assisting NCAs with the consistent implementation of sanctions by market operators including the suspension of trading in instruments by venues;
- Central Securities Depositories – ESMA is monitoring, in coordination with NCAs, the impact of sanctions on CSDs’ operations and assisting with their implementation in a consistent manner. It is also consolidating data on the levels of settlement fails as one of the indicators to monitor market developments;
- Cyber Security – ESMA is facilitating the collection and sharing of information and experiences among NCAs regarding cyber incidents; and Risk assessment – ESMA continuously monitors the risks to market participants and financial stability and exchanges its risk assessment regularly with policy makers and authorities at national, EU and international level.
- Risk assessment – ESMA continuously monitors the risks to market participants and financial stability and exchanges its risk assessment regularly with policy makers and authorities at national, EU and international level
- Sanctions Compliance – financial market participants should ensure they comply with the relevant EU sanctions and monitor for any further restrictions. The European Commission (EC) will provide clarity and answer queries on the scope and implementation of these and ESMA is supporting the EC in collecting such queries;
- Market disclosure – issuers should disclose as soon as possible any inside information concerning the impacts of the crisis on their fundamentals, prospects, and financial situation in line with their transparency obligations under the Market Abuse Regulation, unless the conditions for a delayed disclosure are met; and
- Financial Reporting – issuers should provide transparency, to the extent possible on both a qualitative and quantitative basis, on the actual and foreseeable direct and indirect impacts of the crisis on their business activities, exposures to the affected markets, supply chains, financial situation and economic performance in their 2021 year-end financial report if these have not yet been finalised and in the annual shareholders’ meeting or otherwise in their interim financial reporting disclosures.
FATF amendments to Recommendation 24 on prevention of misuse of legal persons
On 4 March 2022, the Financial Action Task Force (FATF) adopted amendments to Recommendation 24, which requires countries to prevent the misuse of legal persons for ML/TF and to ensure that there is adequate, accurate and up-to-date information on the beneficial ownership and control of legal persons.
The amendments explicitly require a multi-pronged approach for the collection of beneficial ownership information, to ensure it is available to competent authorities in a timely manner.
The FATF will also analyse the growing practical experience of implementing beneficial ownership registries, with a view to identifying best practices and supporting implementation by countries. The FATF is, in parallel, reviewing recommendation 25 on beneficial ownership of legal arrangements, with a view to ensuring consistent and appropriately tailored beneficial ownership standards and smooth implementation.
EBA report on supervision of anti-money laundering and countering the financing of terrorism
On 22 March 2022, the European Banking Authority (EBA) published the findings from its assessment of competent authorities’ approaches to the anti-money laundering and countering the financing of terrorism (AML/CFT) supervision of banks. Since the EBA started those reviews in 2019 and strengthened its AML/CFT guidance, national supervisors have started to adopt meaningful reforms to improve their AML/CFT supervision, but the EBA found that significant challenges remain in important areas such as the identification and assessment of money laundering and terrorist financing (ML/TF) risks.
The EBA found that most competent authorities in its sample were committed to strengthening their approach to AML/CFT supervision. Several competent authorities took steps to put in place a holistic approach to tackling ML/TF risks in their banking sector and changes introduced after the recent transposition of relevant EU legislation, such as greater enforcement powers, have started to make a difference. Furthermore, AML/CFT teams in almost all competent authorities that the EBA reviewed have grown significantly and are set to expand further, and cooperation with prudential supervisors and other EU AML/CFT supervisors has become a clear priority for all, in line with the EBA’s regulatory framework.
Among the common challenges that supervisors face, the EBA highlights difficulties in (i) identifying ML/TF risks in the banking sector and in individual banks; (ii) translating ML/TF risk assessments into risk-based supervisory strategies; (iii) using available resources effectively, including by ensuring sufficiently intrusive onsite and offsite supervision; and (iv) taking proportionate and sufficiently dissuasive enforcement measures to correct AML/CFT compliance weaknesses. The EBA also found that cooperation with Financial Intelligence Units (FIUs) was not always systematic and often ineffective. These challenges have hampered the implementation of an effective risk-based approach to AML/CFT supervision.
On 31 March 2022, MEPs from the Committee on Economic and Monetary Affairs (ECON) and the Committee on Civil Liberties (LIBE) adopted their position on draft legislation strengthening European Union rules against money laundering and terrorist financing.
Crypto-assets’ transfers would need to be traced and identified to prevent their use in money laundering, terrorist financing, and other crimes.
- The legislation is part of the new EU anti-money laundering package
- Aim is to ensure crypto-assets can be traced in the same way as traditional money transfers
- There is an absence of rules for tracing transfers of crypto-assets like bitcoins and electronic money tokens
Traceability of transfers of crypto-assets
Under the new requirements agreed by MEPs, all transfers of crypto-assets will have to include information on the source of the asset and its beneficiary, information that is to be made available to the competent authorities. The rules would also cover transactions from so-called unhosted wallets (a crypto-asset wallet address that is in the custody of a private user). Technological solutions should ensure that these asset transfers can be individually identified.
The aim is to ensure that crypto transfers can be traced and suspicious transactions blocked. The rules would not apply to person-to-person transfers conducted without a provider, such as bitcoins trading platforms, or among providers acting on their own behalf.
No minimum thresholds
Due to their speed and virtual nature, crypto-asset transactions easily circumvent existing rules based on transaction thresholds. MEPs decided therefore to remove minimum thresholds and exemptions for low-value transfers.
Public register of high-risk entities
MEPs want the European Banking Authority (EBA) to create a public register of businesses and services involved in crypto-assets that may have a high risk of money-laundering, terrorist financing and other criminal activities, including a non-exhaustive list of non-compliant providers.
Before making the crypto-assets available to beneficiaries, providers would have to verify that the source of the asset is not subject to restrictive measures and that there are no risks of money laundering or terrorism financing.
EU investment funds
ESMA and National Competent Authorities find room for improvement in funds’ liquidity stress testing
On 30 of March ESMA announced that it had carried out a supervisory engagement with investment funds together with National Competent Authorities (NCAs). The exercise focused on liquidity risk in corporate debt and real estate funds, with the results showing that the funds included in the scope of the analysis do not pose any substantial risk for financial stability.
While the overall degree of compliance is satisfactory, it also highlights some room for improvement and continued monitoring, especially on the liquidity stress testing and valuation of less liquid assets.
Many NCAs reported that management companies were able to manage episodes of valuation uncertainty in March 2020 and that they have not identified any strong valuation issue for the funds in the scope of the exercise.
In May 2020, the European Systemic Risk Board recommended that ESMA coordinate with NCAs on a focused supervisory engagement with investment funds that have significant exposures to corporate debt (different from MMF) and real estate, in order to assess their preparedness to potential future redemptions and valuation shocks.
Next steps: ESMA, in 2022 will facilitate discussions on these topics among NCAs on the application of the Liquidity Stress Testing (LST) guidelines in UCITS and AIFs and is conducting a 2022 Common Supervisory Action on the valuation of less liquid assets in UCITS and open-ended AIFs.
Updated ESAs supervisory statement on the application of the SFDR
On 25 March 2022, the European Supervisory Authorities updated their supervisory statement on the application of the SFDR covering:
- a new timeline. The ESAs recommend that national competent authorities and market participants use the current interim period to 1 January 2023 to prepare for the application of the future Commission Delegated Regulation containing RTS, while also applying the relevant measures of the SFDR and the Taxonomy Regulation according to the relevant application dates outlined in the supervisory statement
- expectations about the explicit quantification of the product disclosures under Article 5 and 6 of the Taxonomy Regulation. The ESAs clarify that, under Article 5 and 6 of the Taxonomy Regulation, the supervisory expectation for disclosures during the interim period is that financial market participants should provide an explicit quantification, through the numerical disclosure of the percentage, of the extent to which investments underlying the financial product are taxonomy-aligned
- the use of estimates. While estimates should not be used, where information is not readily available from investee companies’ public disclosures, financial market participants may rely on equivalent information on taxonomy-alignment obtained directly from investee companies or from third party providers. Any numerical disclosure can also be accompanied by a qualitative clarification explaining how the financial product addresses the determination of the proportion of taxonomy-aligned investments of the financial product, for example by identifying the sources of information for that determination.
This updated statement replaces the initial supervisory statement published in February 2021.
Law 9(I) of 2022: Law amending the laws regarding the provision of investment services and the exercise of investment activities and the operation of regulated markets laws of 2017 – 2021
On 8 March 2022 CySEC published on its website Law 9(I) of 2022 (in Greek only) which is the Cypriot transposition into law of EU Directive 2021/338 the so called MiFID II Quick Fix Directive. The Directive was voted by the EU Parliament and the Council amending information requirements, product governance and position limits to help with the recovery from the COVID-19 crisis.
Summary of main changes:
- Exemption from product governance requirements where:
- Services relate to bonds with no other embedded derivative other than a make whole clause; or
- Investment instruments are marketed/distributed exclusively to eligible counterparties;
- Changes to the provision of information on costs and charges after concluding a transaction when using distant communication channels;
- Streamlining issues related to inducements and specifically the issue of provision of investment research with brokerage services;
- Setting floors on position limits Competent Authorities might set regarding agricultural derivatives and on derivatives of critical importance when those are traded on trading venues, as well as economically equivalent derivatives to the aforesaid traded OTC;
- The requirement on execution venues to make available to the public data relating to the quality of execution (RTS 27 reports) is suspended until 28 February 2023.
The amending law L.9(I)/2022 came into effect upon its publication in the Official Gazette of the Republic of Cyprus (21st of February).
Circular C494 Information on potential Russian Sanctions Evasion Attempts
On 29 March 2022 the CySEC issued Circular C494 to draw the attention of Regulated Entities (including but not limited to CIFs, AIFMs, UCITS Man.Cos, Internally Managed UCIs, CASPS, ASPs etc.) to informative material issued by various competent authorities in relation to sanctions evasion attempts and red flags.
CySEC urged Regulated Entities to be aware of these red flags, as highlighted in the documents, when implementing their due diligence measures, especially for ongoing monitoring of accounts and transactions.