INVESTMENT SERVICES & CAPITAL MARKETS
MIFID II/MIFIR
ESMA publishes data for the systematic internaliser calculations
On 30 July 2021, ESMA published data for the systematic internaliser quarterly calculations for equity, equity-like instruments, bonds and for other non-equity instruments under MiFID II and MiFIR.
The data which is published on a voluntary basis covers the total number of trades and total volume over the period January to June 2021 for the purpose of the systematic internaliser (SI) calculations under MiFID II for:
- 22,491 equity and equity-like instruments;
- 113,771 bonds; and
- 4,818 sub-classes of derivatives (including equity derivatives, interest rate derivatives, commodity derivatives, emission allowance and derivatives thereof ).
The SI test shall be performed by 15 August 2021.
The data is made available through the SI register in excel files and for equity, equity-like instruments and bonds also through FITRS in the XML files with publication date 30 July 2021.
ESMA makes new bond liquidity data available
On 30 July 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.
ESMA published the latest quarterly liquidity assessment for bonds available for trading on EU trading venues. For this period, there are currently 541 liquid bonds subject to MiFID II transparency requirements.
ESMA’s liquidity assessment for bonds is based on a quarterly assessment of quantitative liquidity criteria, which includes the daily average trading activity (trades and notional amount) and the percentage of days traded per quarter. ESMA updates the bond market liquidity assessments quarterly. However, additional data and corrections submitted to ESMA may result in further updates within each quarter, published in ESMA’s Financial Instruments Transparency System (FITRS), which shall be applicable the day following publication.
The full list of assessed bonds will be available through FITRS in the XML files with publication date from 30 July 2021 and through the Register web interface.
ESMA makes first consolidated tape provider data available
On 30 July 2021, ESMA made available the first consolidated tape provider (CTP) data.
The data made public by a CTP in accordance with Articles 10 and 21 of Regulation (EU) No 600/2014 (MiFIR) shall represent at least 80% of both the total number of transactions and the total volume of transactions in the relevant asset class published in the European Union by all Approved Publication Arrangements (APAs), and of all trading venues during the assessment period.
Therefore, ESMA is publishing on a voluntary and best effort basis the total number of transactions and the total volume of transactions for the asset classes of bonds, emission allowances and emission allowance derivatives to support CTPs in their compliance with the Regulation in order to allow an operator wishing to enter this business to be able to perform the required test.
The data is published in the new register Data for the non-equity consolidated tape providers calculations.
The CTP data will be updated on a biannual basis, by 1 February and 1 August of each year.
ESMA MiFID II/MiFIR Annual Review Report on RTS 2
On 28 July 2021, ESMA published the MiFID II/MiFIR Annual Review Report under Commission Delegated Regulation (EU) 2017/583 (RTS 2). ESMA proposes to the European Commission to move to stage three of the phase-in for the transparency requirements, for both the average daily number of trades threshold used for the quarterly liquidity assessment of bonds, and for the pre-trade size specific to the instrument threshold for bonds.
ESMA suggests to the European Commission to:
- move to stage three for the average daily number of trades threshold used for the quarterly liquidity assessment of bonds;
- move to stage three for the pre-trade size specific to the instrument threshold for bonds; and
- not to move to stage two for the pre-trade size specific to the instrument threshold for the other non-equity instruments – ESMA considered that the level of completeness and the quality of the data were still insufficient to perform the annual transparency calculations in 2020 for a number of instrument classes and therefore it was considered premature to move to the next stage.
The proposals to move to stage three are expected to improve the currently limited pre- and post-trade transparency available to market participants in the bond market.
In order for the move to stage three to take effect, the European Commission has to endorse the amended regulatory technical standards. Following such endorsement, they are then subject to a non-objection procedure by the European Parliament and the Council.
ESMA publishes results of 2020 Common Supervisory Action on MiFID II suitability requirements
On 21 July 2021, ESMA published the results of its 2020 Common Supervisory Action (CSA) on MiFID II suitability requirements.
The 2020 CSA has shown that firms overall comply with key elements of the suitability requirements that were already regulated under MiFID I, such as the understanding of products and clients and their processes and procedures to ensure the suitability of investmen20ts. However, shortcomings and areas of improvement have emerged about some of the new requirements introduced by MiFID II, notably the requirement to consider the cost and complexity of equivalent products, the costs and benefits of switching investments and suitability reports.
ESMA, based on the results of the CSA, will update, in 2021/2022, its guidelines on suitability to address, where needed, some areas where a lack of convergence has emerged or/and to further clarify some of the new MiFID II requirements. It will also look to complement the guidelines with relevant examples of good and poor practices which emerged from the CSA.
Furthermore, based on the results of the CSA, National Competent Authorities will undertake follow-up actions on individual cases, where needed, to ensure that regulatory breaches as well as other shortcomings or weaknesses identified are remedied.
ESMA updates Q&As on MiFIR data reporting
On 19 July 2021, ESMA updated its Q&As on MiFIR data reporting. ESMA has amended question 6 in respect of the legal entity identifier of the issuer. Amongst other amendments to the question, an additional sub-paragraph (b) has been added, addressing if in case of a financial instrument issued by an umbrella fund that is an alternative investment fund or an undertaking for the collective investment in transferable securities, which LEI code should be reported in the field 5 (issuer or operator of the trading venue identifier) of regulatory technical standard (RTS) 23 and related RTS, as well as implementing technical standard under Article 4 of the Market Abuse Regulation.
ESMA report finds NCAs imposed sanctions of €8.4 million for MIFID II breaches in 2020
On 19 July 2021, ESMA published its third report on the use of sanctions and measures by National Competent Authorities (NCAs) under MiFID II.
NCAs activity in this area increased in 2020 compared to 2018 and 2019, both in terms of the total number of sanctions and measures and the amount of fines. Overall, in 23 (out of 30) EU/EEA Member States, NCAs imposed a total of 613 sanctions and measures in 2020 for an aggregated value of about €8.4 million, compared to 371 sanctions and measures and about €1.8 million, issued by NCAs of 15 EU/EEA member states, in 2019.
Some differences persist in the way sanctions and measures are distinguished and identified for the purpose of reporting to ESMA. As a result, the figures in this Report on the number of imposed sanctions and measures imposed should be read carefully.
The MiFID II sanctions report contains an overview of the applicable legal framework and information on the sanctions and measures imposed by NCAs in accordance with Article 71(4) of the MiFID II Directive from 1 January 2020 to 31 December 2020. NCAs submit data on the use of sanctions to ESMA, which forms the basis of the annual aggregated report.
ESMA continues its work to foster supervisory convergence in the application of MiFID II and will proceed issuing reports on sanctions on an annual basis for future reporting periods..
ESMA consults on draft guidelines on MiFID II remuneration requirements
On 19 July 2021, ESMA published a consultation paper on draft guidelines on certain aspects of the MiFID II remuneration requirements. ESMA notes that the purpose of the draft guidelines is to enhance clarity and foster convergence in the implementation of certain aspects of the new MiFID II remuneration requirements, replacing the existing ESMA guidelines on the same topic, issued in 2013.
The consultation builds on the text of the 2013 guidelines, which have been substantially confirmed. In addition, the consultation takes into account new requirements under MiFID II and the results of supervisory activities conducted by national competent authorities on the topic. By pursuing the objective of ensuring a consistent and harmonised application of the requirements, the proposed guidelines will make sure that the objectives of MiFID II can be efficiently achieved. ESMA believes that the implementation of these guidelines should strengthen investor protection. ESMA expects to publish the final report and guidelines by the end of Q1 2022. The deadline for comments is 19 October 2021.
European Commission final Delegated Regulation specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level under MiFID II
On 15 July 2021, the European Commission published the final version of the Delegated Regulation, supplementing MiFID II and repealing Delegated Regulation (EU) 2017/592, specifying the criteria for establishing when an activity is to be considered to be ancillary to the main business at group level.
The European Commission explains that the Ancillary Activity Exemption has been amended and therefore this Delegated Regulation deletes the Overall Market Size Test of Article 2 of Delegated Regulation 2017/592 and introduces the new De-Minimis Threshold Test.
ESMA publishes disclosure and investor protection guidance on SPACs
On 15 July 2021, ESMA issued a Public Statement on the prospectus disclosure and investor protection issues raised by special purpose acquisition companies (SPACs). SPACs are shell companies that are admitted to trading on a trading venue with the intention to acquire a business and are often referred to as blank check companies. The persons responsible for setting up SPACs are the sponsors, who typically have significant expertise in one or more economic sectors and use the SPAC to acquire companies in those sectors. SPACs sell their shares, often together with warrants, to investors to finance the acquisition. After the acquisition, the SPAC becomes a normal listed company.
Prospectus disclosure
The statement, in view of both the complexity and the diversity of SPAC transactions, sets out ESMA’s expectations on how issuers should satisfy the specific disclosure requirements of the Prospectus Regulation to enhance the comprehensibility and comparability of SPAC prospectuses. This should help to ensure that national competent authorities (NCAs):
- take a coordinated approach to the scrutiny of SPAC prospectuses;
- provide SPACs with an understanding of the disclosure that NCAs will expect them to include in their prospectuses; and
- support investors’ analysis of these transactions.
Investor protection
The statement highlights ESMA’s view that SPAC transactions may not be appropriate investments for all investors due to risks relating to dilution, conflicts of interests in relation to sponsors’ incentives and the uncertainty as to the identification and evaluation of the target company.
In addition, ESMA emphasises the importance of the proper application of the MiFID II product governance rules and their role in ensuring investor protection.
ESMA and NCAs will continue to monitor SPAC activity to determine if additional action is necessary to promote coordinated supervisory action aimed at preserving investor protection.
ESMA warns firms and investors about risks arising from payment for order flow and from certain practices by “zero-commission brokers”
On 13 July 2021, ESMA issued a statement to remind firms that the receipt of payment for order flow (PFOF) touches upon a number of key MiFID II obligations aimed at ensuring that they act in their clients’ best interest when executing their orders.
In light of the serious investor protection concerns raised by PFOF and the multiple requirements applying to it, ESMA states that the receipt of PFOF by firms from third parties, is unlikely to be compatible with MiFID II and its delegated acts, in most cases.
PFOF is the practice of brokers receiving payments from third parties for directing client order flow to them as execution venues. ESMA states that the receipt of PFOF from third parties by a firm executing client orders causes a clear conflict of interest between the firm and its clients because it incentivises the firm to choose the third party offering the highest payment, rather than the best possible outcome for its clients.
ESMA states that PFOF received from third parties when executing client orders constitutes an inducement for the purposes of MiFID II. It highlights that firms receiving PFOF when executing client orders must comply with the quality enhancement and best interest requirements and clearly disclose the existence, nature and amount of PFOF to the client.
ESMA also reminds “zero-commission brokers” that as their clients will always incur costs (e.g. implicit costs and third party payments received by the firm), the marketing of the service as “cost-free”, will infringe the firm’s compliance with the MiFID requirements and it could incentivise retail investors’ gaming or speculative behaviour due to the incorrect perception that trading is free.
ESMA requests National Competent Authorities (NCAs), especially in those Member States in which PFOF has been observed, to prioritise this topic in their supervisory activities for 2021 or early 2022.
ESMA consults on the review of transparency requirements under MiFIR
On 9 July 2021, ESMA published a consultation paper on its review of the regulatory technical standards – RTS 1 equity and RTS 2 – non-equity transparency – on transparency requirements under the Markets in Financial Instruments Regulation (MiFIR).
The Consultation Paper focuses on technical issues and addresses topics that do not require a prior change of MiFID II/MiFIR. The review includes:
- providing more clarity on non-price forming transactions and the reporting of such transactions which will help obtain a better picture of the actual split between lit and over-the-counter (OTC) trading;
- a recalibration of the regime for commodity derivatives ensuring better tailored transparency requirements for this class of derivatives);
- providing further clarity on the reporting fields for post-trade transparency and the reporting of reference data with the overall objective of improving the quality of post-trade transparency data;
- providing clarification on the pre-trade transparency requirements for new types of trading systems, i.e. frequent batch auctions and hybrid systems; and
- increasing the pre- and post-trade large in scale thresholds for the trading of Exchange Traded Funds (ETFs) to achieve a more meaningful level of transparency in the ETF market.
The Consultation Paper reflects the findings and recommendations of various MiFID review reports published by ESMA in 2019 and 2020 as well as the feedback provided by stakeholders on necessary amendments to the two RTS over the last years. The consultation closes on 1 October 2021. ESMA aims to publish a final report and submit draft RTS to the EC for adoption in Q1 2022.
ESMA consults on derivatives clearing and trading obligations in view of the benchmarks transition
On 9 July 2021, ESMA launched a consultation on the review of the regulatory technical standards (RTS) specifying classes of derivatives subject to the clearing (CO) and trading obligations (DTO).
The Consultation Paper examines the state of the transition away from EONIA and LIBOR, which will cease to exist, and onto alternative risk-free rates, such as €STR, SONIA and SOFR, in the OTC interest rate derivatives market. The overall aim of this consultation is to amend the scope of both the CO and the DTO to accompany the benchmark transition for OTC derivatives.
ESMA is seeking stakeholder feedback on the proposed changes to the scope of these obligations and will use the input to assess what changes to the RTS should be introduced to accompany the benchmarks transition. ESMA expects to submit the final report to the Commission in autumn 2021 and aims to ensure that the scope of derivatives classes subject to the CO and the DTO reflect the transition to the new alternative rates at the beginning of 2022.
Market Abuse Regulation
ESMA consults on amendments to MAR guidelines on delayed disclosure of inside information
On 15 July 2021, ESMA launched a Consultation Paper on the review of its Guidelines on delayed disclosure of inside information under the Market Abuse Regulation (MAR) in relation to its interaction with prudential supervision.
Issuers, under MAR, can delay the disclosure of inside information where immediate disclosure is likely to prejudice an issuer’s legitimate interest, the delay of disclosure is not likely to mislead the public and confidentiality is ensured.
The ESMA MAR Guidelines include a list of legitimate interests of issuers that are likely to be prejudiced by immediate disclosure of inside information. The purpose of this consultation is to build and expand on these Guidelines, in the context of the interaction between the MAR transparency obligations vis-à-vis inside information and the prudential supervisory framework.
The deadline for comments is 27 August 2021. ESMA expects to publish a final report with the amended guidelines by the end of 2021.
EMIR
ESMA 3rd annual report on supervisory measures and penalties under Articles 4, 9, 10 and 11 of EMIR
On 15 July 2021, ESMA published its 3rd annual report on the penalties imposed by competent authorities, including supervisory measures, fines and periodic penalty payments, covering the period from January 2019 to December 2020.
The report highlights among other aspects: (i) an increase in the use of EMIR data for supervisory purposes; (ii) greater clarity on which counterparties are subject to the clearing obligation thanks to the expanded clearing threshold notification mechanism introduced under EMIR Refit; (iii) some challenges in looking at group activities; (iv) a need for more supervisory measures regarding third country entities with a link to the EU; and (v) the benefits of exchanges among national competent authorities, facilitated by ESMA with initiatives such as workshops to discuss supervisory cases.
In addition, the report also includes reference to enforcement cases, which for the period covered, resulted in the imposition of sanctions in France, Italy, Liechtenstein and Luxembourg.
ESMA consults on EMIR reporting guidelines
On 13 July 2021, ESMA launched a public consultation on its draft Guidelines for derivatives reporting under EMIR.
The Consultation Paper includes draft Guidelines on a wide range of topics related to reporting, data quality and data access under EMIR Refit. ESMA has also published validation rules that clarify dependencies between data fields, as well as their applicability in the different use cases.
The Consultation paper focuses on:
- how reports should be constructed and in what circumstances reports should be made;
- reporting logic, including the use of action and event types;
- reporting in the case of delegation as well as under provisions on allocation of responsibility for reporting;
- the population of specific sections of fields; and
- the correct population of fields for different reporting scenarios and different products.
The Draft Guidelines also clarify important aspects of the procedures to be implemented by reporting entities and Trade Repositories to enhance data quality. The paper also clarifies certain operational aspects concerning data access.
The proposed Guidelines, together with the validation rules, complement the revised draft EMIR technical standards on reporting by counterparties, data quality and data access. These standards were submitted to the European Commission on 16 December 2020 and, for the first time under EMIR, mandated the end-to-end use of ISO 20022 XML messages.
The closing date for responses is 30 September 2021. ESMA will consider the responses to this consultation with a view to finalising the proposed Guidelines and will publish a final report in Q4 2021/Q1 2022 (subject to the adoption of the draft RTS and ITS on reporting by the European Commission).
ESMA publishes methodology for assessing third country CCPs systemic importance
On 13 July 2021, ESMA published a methodology for assessing whether a third country central counterparty (TC-CCP) or some of its clearing services are of such substantial systemic importance that the TC-CCP should not be recognised to provide certain clearing services or activities in the European Union.
The methodology has been developed by ESMA’s CCP Supervisory Committee and is based on the requirements of Article 25 (2c) of EMIR.
DTCC derivatives repository fined €408,000 for EMIR data breaches
On 12 July 2021, ESMA fined DTCC Derivatives Repository Plc (DDRL) a total of €408,000 for seven infringements of the European Market Infrastructure Regulation (EMIR) regarding data confidentiality, data integrity, and direct and immediate access to data.
The breaches relate to:
- granting certain asset managers access to data that they were not entitled to receive;
- setting up its IT system in a way which altered the substance of certain information reported to DDRL; and
- failing to provide regulators with direct and immediate access to relevant data.
The breaches, which were committed between 2014 and 2018, were found to have resulted from negligence on the part of DDRL.
EMIR provides for the protection of the confidentiality and integrity of data received by trade repositories (TRs) and requires TRs to provide such data to regulators. This is a key requirement to improve transparency and facilitate the monitoring of systemic risks in derivatives markets.
This was the first time ESMA found breaches in relation to a TR’s obligation to ensure the confidentiality and the integrity of the data reported under EMIR. DDRL may appeal against this decision to the Board of Appeal of the European Supervisory Authorities.
Prospectus Regulation
ESMA see small decrease in EEA prospectus approvals in 2020
On 20 July 2021, ESMA published a joint Annual Report on Prospectus Activity and Sanctions for 2020.
ESMA found that the number of prospectus approvals across the European Economic Area (EEA) dropped by almost 5% compared to 2019, which appears to indicate that the Covid-19 crisis did not have the anticipated impact on approvals. In addition, only Belgium’s Financial Services and Markets Authority (FSMA) and Norway’s Finanstilsynet imposed prospectus related sanctions in 2020 with the majority imposed by the FSMA.
ESMA updates Q&As on the Prospectus Regulation
On 16 July 2021, ESMA published an updated version of its Q&As on the Prospectus Regulation with five new Q&As. Firstly, two new Q&As have been added on updating the information in a tripartite prospectus after a registration document (RD) or universal registration document (URD) has expired, specifically: (i) if it is possible to update the RD information in a tripartite prospectus after the RD or URD has expired; and (ii) how an issuer should include information from a new RD or URD in an existing tripartite prospectus. Secondly, a new Q&A has been added on the application of Article 1(6b) (reverse acquisition), specifically asking whether if a securities issuance leads to a reverse acquisition, whether a prospectus should be produced when the listed issuer is an empty shell and not a business. Thirdly, ESMA has addressed the application of Article 3(2) and if it is possible to make an offer of securities to the public in more than one member state using the exemption in Article 3(2). Finally, ESMA has clarified the application of Level 3 guidance to EU Recovery Prospectuses, in regard to whether it applies to the EU Recovery Prospectus.
On 27 July 2021, ESMA further updated its Q&As on the Prospectus Regulation. The Q&As were updated with answers provided by the European Commission in accordance with Article 16b(5) of the ESMA Regulation, in respect of: (i) public offer – offer of securities to the public; (ii) choice of the home member state; (iii) interim financial information; (iv) financial information – profit estimate; (v) restrictions on the transferability of shares; (vi) secondary issuance prospectus for issuers listed on SME Growth markets; (vii) offers of warrants; and (viii) redeemable debt securities.
Short Selling Regulation
European Commission consults on Draft Delegated Act on adjustment of the threshold for the notification of significant net short positions in shares
On 15 July 2021, the European Commission began consulting on a draft Delegated Regulation amending the Short Selling Regulation (SSR) as regards the adjustment of the relevant threshold for the notification of significant net short positions in shares.
The explanatory memorandum explains that on 16 March 2020, ESMA made use of its emergency intervention powers under Article 28 of the SSR and issued a decision to lower the notification threshold for net short positions in shares admitted to trading on a regulated market from 0.2% to 0.1% for a period of three months. ESMA subsequently renewed that decision in June, September and December 2020. The events following the Covid-19 outbreak and the increased visibility obtained by competent authorities on volumes of net short positions have convinced ESMA that the notification threshold should be established at 0.1% on a permanent basis. The explanatory memorandum also sets out ESMA’s reasoning, which it provided to the European Commission in an opinion in May. The deadline for comments is 12 August 2021.
FUND REGULATION
PRIIPS
European Commission consults on proposed Regulation to extend exemption from KID requirement under PRIIPs Regulation
On 15 July 2021, the European Commission began consulting on a draft Regulation amending the PRIIPs Regulation to provide for an extension of the transitional arrangement for management companies, investment companies and persons advising on, or selling, UCITS and non-UCITS.
The European Commission explains that the PRIIPs Regulation requires PRIIPs manufacturers to comply with a uniform set of product disclosure requirements and provide retail investors with a key information document (KID) on each PRIIP they offer. The PRIIPs Regulation provides for a temporary exemption from the requirement to provide retail investors with a KID for management companies, investment companies and persons advising on, or selling, units of UCITS and non-UCITS until 31 December 2021.
The European Supervisory Authorities are currently in the process of developing regulatory technical standards (RTS) specifying the presentation and the content of the KID, its standard format, the methodology for presenting risk and reward and calculating costs, the conditions and minimum frequency for reviewing the information in the KID and the conditions on providing the KID to retail investors.
In order to give the time needed to complete the legislative procedure of the RTS, allow their implementation and to reduce legal uncertainty, the European Commission proposes in the draft Regulation to extend the transitional arrangement to 30 June 2022.
Alternative Investment Funds (AIFs) and UCITS
ESMA reports on penalties and measures imposed under the AIFMD and UCITS Directive in 2020
On 20 July 2021, ESMA published two reports on penalties and measures imposed under the AIFMD and UCITS Directive, respectively, in 2020.
In respect of both reports, ESMA notes that broadly, the data gathered under the sanction reports published so far keeps evidencing that the sanctioning powers are not equally used among National Competent Authorities (NCAs) and, besides a few NCAs, the number and amount of sanctions issued at national level remains relatively low. ESMA states that work will continue in the future (including by issuing the annual iterations of these reports) to promote further convergence in the use of sanctioning powers by NCAs across the European Union.
ESMA updates its Q&As on AIFMD and UCITS
On 16 July 2021, ESMA updated its Q&A on AIFMD and its Q&A on UCITS. New Q&As have been added on the ESMA guidelines on performance fees in UCITS and certain types of alternative investment funds relating to performance fee scenarios.
SUSTAINABLE FINANCE
Sustainable Finance Disclosure Regulation
European Commission Q&A on the application of the Sustainable Finance Disclosure Regulation
On 26 July 2021, ESMA published a European Commission decision and annex (adopted on 6 July) addressing answers about the application of the SFDR. The answers respond to questions that the European Supervisory Authorities forwarded to the European Commission in January 2021.
The answers cover, among other things:
- whether the SFDR applies to registered (sometimes referred to as sub-threshold) alternative investment fund managers (AIFMs);
- whether the SFDR applies to non-EU AIFMs, for example when they market a sustainable EU Alternative Investment Fund under a National Private Placement Regime;
- the application of the calculation of the 500-employee threshold to the parent undertaking of a large group – specifically, whether it be applied to both EU and non-EU entities of the group without distinction as to the place of establishment of the group and/or subsidiary, and whether the due diligence statement should include impacts of the parent undertaking only or must it include the impacts of the group at a consolidated level; and
- the meaning of “promotion” in the context of products promoting environmental or social characteristics or having sustainable investment as their objectives.
European Commission delays application date of regulatory technical standards (RTS) under SFDR
On 23 July, the European Commission published a letter to the European Economic and Financial Affairs Council and the Council of the European Union, confirming a six-month delay of the date of application of the RTS under the SFDR to 1 July 2022 (originally 1 January 2022). The European Commission also confirms that it plans to bundle all 13 of the RTS in a single delegated act.
On 27 July 2021, EIOPA updated its webpage for the joint European Supervisory Authorities (ESAs) supervisory statement on the application of the SFDR, stating that supervisory statement should be read in light of the content of the letter published by the European Commission. The ESAs will revise the supervisory statement in due course to reflect the change in the RTS’ date of application.
Taxonomy Regulation
European Commission adopts Delegated Act based on Article 8 of Taxonomy Regulation
On 6 July 2021, the European Commission adopted a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the Taxonomy Regulation – this will be transmitted for scrutiny by the European Parliament and the Council of the EU for a period of 4 months, extendable once by 2 months.
The European Commission has also published FAQs to accompany the Delegated Act, covering amongst other things the Delegated Act’s interaction with the (i) climate Delegated Act adopted on 4 June; (ii) the future environmental Delegated Act specifying the technical screening criteria for the remaining environmental objectives; (iii) the Non-Financial Reporting Directive and related proposal for a Corporate Sustainability Reporting Directive; and (iv) the SFDR, and the forthcoming Ecolabel and EUGBS. The FAQs also discuss the timeframe for the Delegated Act’s adoption and implementation. The delegated act is intended to come into application from 1 January 2022.
European Green Bond
EC adopts Sustainable Finance Strategy and a proposal for new European Green Bond Standard (EUGBS)
On 6 July 2021, the European Commission adopted a number of measures to help improve the flow of money towards financing the transition to a sustainable economy.
First, the European Commission has published a Communication and factsheet on its adoption of the new Sustainable Finance Strategy which sets out several initiatives to tackle climate change, and other environmental challenges. The European Commission has also published a summary of responses to its previous consultation on the strategy. The Sustainable Finance Strategy includes six sets of actions: (i) extend the existing sustainable finance toolbox to facilitate access to transition finance; (ii) improve the inclusiveness of SMEs and consumers, by giving them the right tools and incentives to access transition finance; (iii) enhance the resilience of the economic and financial system to sustainability risks; (iv) increase the contribution of the financial sector to sustainability; (v) ensure the integrity of the EU financial system and monitor its orderly transition to sustainability; and (vi) develop international sustainable finance initiatives and standards, and support EU partner countries. The European Commission will report on the Strategy’s implementation by the end of 2023.
Secondly, the European Commission adopted a proposal for a new EUGBS, which it notes will create a high-quality voluntary standard for bonds financing sustainable investment. There are four key requirements under the framework for the EUGBS proposal: (a) the funds raised by the bond should be allocated fully to projects aligned with the EU Taxonomy; (b) there must be full transparency on how bond proceeds are allocated through detailed reporting requirements; (c) all EU green bonds must be checked by an external reviewer to ensure compliance with the Regulation and that funded projects are aligned with the Taxonomy; and (d) external reviewers providing services to issuers of EU green bonds must be registered with and supervised by ESMA. The European Commission has also published an impact assessment on this proposal, some Q&As, as well as the opinion of the Regulatory Scrutiny Board.
FINANCIAL CRIME
EBA consults on new Guidelines on the role of AML/CFT compliance officers
On 2 August 2021, European Banking Authority (EBA) launched a public consultation on new Guidelines on the role, tasks and responsibilities of anti-money laundering and countering the financing of terrorism (AML/CFT) compliance officers. The Guidelines also include provisions on the wider AML/CFT governance set-up, including at the level of the group. Once adopted, these Guidelines will apply to all financial sector operators that are within the scope of the AML Directive. This consultation runs until 2 November 2021.
The EBA drafted these Guidelines in line with its legal mandate to lead, coordinate and monitor the EU financial sector’s fight against ML/TF.
In drafting these guidelines, the EBA fulfills a request by the Commission’s request in its Supra-National Risk Assessment (SNRA) of 2019 to develop guidance that ‘clarifies the role of AML/CFT compliance officers in credit and financial institutions’.
The draft Guidelines comprehensively address, for the first time at the level of the EU, the whole AML/CFT governance set-up. They set clear expectations of the role, tasks and responsibilities of the AML/CFT compliance officer and the management body and how they interact, including at group level. AML/CFT compliance officers need to have a sufficient level of seniority, which entails the powers to propose, on their own initiative, all necessary or appropriate measures to ensure the compliance and effectiveness of the internal AML/CFT measures to the management body in its supervisory and management function.
Without prejudice to the overall and collective responsibility of the management body, the draft Guidelines also specify the tasks and role of the member of the management board, or the senior manager where no management board exists, who are in charge of AML/CFT overall, and on the role of group AML/CFT compliance officers. As information reaching the management body needs to be sufficiently comprehensive to enable informed decision-making, the draft Guidelines set out which information should be at least included in the activity report of the AML/CFT compliance officer to the management body.
Where a financial services operator is part of a group, the draft Guidelines provide that a Group AML/CFT compliance officer in the parent company should be appointed to ensure the establishment and implementation of effective group-wide AML/CFT policies and procedures and to ensure that any shortcomings in the AML/CFT framework affecting the entire group or a large part of the group are addressed effectively.
Provisions in the draft Guidelines are designed to be applied in a proportionate manner, taking into account the diversity of financial sector operators that are within the scope of the AML Directive. They are also in line with existing ESA guidelines.
European Commission consultations on guidance on existing rules in respect of public-private partnerships (PPPs) preventing and fighting money laundering (ML) and terrorist financing (TF)
On 26 July 2021, the European Commission published a consultation document on its proposed guidance on the rules applicable to the use of PPPs in the framework of preventing and fighting ML and TF.
The consultation aims to obtain information with regard to, for example, the: (i) types of public-private partnerships currently operating in the EU member states in the area of preventing and fighting money laundering and terrorist financing; (ii) public authorities (such as financial intelligence units, law enforcement, and supervisory authorities) and private sector entities which participate; (iii) types of information exchanged within those partnerships and the measures put in place to guarantee the preservation of fundamental rights; (iv) mechanisms put in place to measure the effectiveness and success of those partnerships (such as key performance indicators or any other performance metrics); (v) impacts and added value of the various public-private partnerships in the fight against money laundering and the financing of terrorism; (vi) impacts on fundamental rights, including the presumption of innocence, as well as on the due process of criminal proceedings; (vii) good practices in the development and operation of public-private partnerships; and (viii) potential obstacles to the exchange of information and challenges faced by the authorities and entities participating in PPPs in the area of preventing and fighting money laundering and terrorist financing and what they pertain to.
The European Commission will issue best practices in Q4 2021 The deadline for comments is 2 November 2021.
In addition, on 23 July 2021, the European Commission published a consultation in respect of its roadmap for the proposed guidance – the European Commission will summarise the feedback that it receives in a synopsis report. The deadline for comments on the roadmap is 20 August 2021.
European Commission proposals to strengthen AML and CFT rules
On 20 July 2021, the European Commission published a package of legislative proposals to strengthen the EU’s Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) rules.
The package consists of four legislative proposals:
- Regulation establishing a new European Union AML/CFT Authority – this will be the central authority, which will coordinate national supervisors and enhance cooperation among financial intelligence units;
- Regulation on AML/CFT, containing directly-applicable rules, including in the areas of Customer Due Diligence and Beneficial Ownership;
- the sixth Directive on AML/CFT (AMLD6), replacing the existing AMLD4 (as amended by MLD5), containing provisions that will be transposed into national law, such as rules on national supervisors and Financial Intelligence Units in Member States; and
- revision of the 2015 Regulation on Transfers of Funds to trace transfers of crypto-assets (Regulation 2015/847/EU).
The European Commission states that the aim of this package is to improve the detection of suspicious transactions and activities, and to close loopholes used by criminals to launder illicit proceeds or finance terrorist activities through the financial system. Furthermore, the European Commission notes that the proposals enhance the existing European Union framework by taking into account new and emerging challenges linked to technological innovation. These include virtual currencies, more integrated financial flows in the Single Market and the global nature of terrorist organisations.
The legislative package will now be discussed by the European Parliament and the Council of the European Union. The future AML Authority should be operational in 2024 and will start its work of direct supervision slightly later, once the Directive has been transposed and the new regulatory framework starts to apply. The European Commission has also published: (a) a FAQs; (b) an impact assessment; and (c) a factsheet.
European Commission adopts proposed Directive on cross-border law enforcement access to bank account registries
On 20 July 2021, the European Commission adopted a legislative proposal amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the single access point.
Pursuant to Article 32a of AMLD5, member states are to put in place centralised automated mechanisms, such as central registers or central electronic data retrieval systems, to allow the identification of any natural or legal persons holding or controlling payment accounts, bank accounts and safe-deposit boxes. Directive (EU) 2019/1153 already at present requires member states to designate authorities competent for the prevention, detection, investigation or prosecution of criminal offences in order for them to access and search the centralised automated mechanisms. It also requires member states to include asset recovery offices among their designated competent authorities and enables member states to designate tax authorities and anti-corruption agencies as competent authorities to the extent that these are competent for the prevention, detection, investigation or prosecution of criminal offences under national law.
The deadline for transposing the Directive is 1 August 2021. Furthermore, pursuant to the EC’s proposal for a new anti-money laundering directive, member states shall ensure that the information from centralised bank account registries is available through the bank account registers (BAR) single access point to be developed and operated by the EC – the new anti-money laundering directive will provide access to the BAR single access point only to financial intelligence units (FIUs), the national body which receives suspicious transaction reports from obliged entities and forwards them, as appropriate, to criminal investigation authorities
However, the European Commission states that in the interest of combatting serious crime and, in particular, carrying out effective financial investigations, authorities competent for the prevention, detection, investigation or prosecution of criminal offences also need to have access to the BAR single access point allowing them to identify, analyse and interpret the financial information relevant for criminal proceedings. Thus, the proposal seeks to extend access to the BAR single access point, as introduced by the new anti-money laundering directive, to the authorities competent for the prevention, detection, investigation or prosecution of criminal offences that are designated as competent authorities pursuant to Article 3(1) of Directive (EU) 2019/1153.
CySEC DEVELOPMENTS
ESMA Guidelines on outsourcing to Cloud Service Providers
On 9 July 2021, through the issuance of Circular C457, CySEC informed the affected persons mentioned below of the adoption of Guidelines of the European Securities and Markets Authority (“ESMA”) on outsourcing to Cloud Service Providers (“CSPs”).
Affected persons include: AIFMs, Depositaries of AIFs, UCITS, CCPs, Trade repositories, IFs and Credit Institutions, CSDs, Credit rating agencies, Securitisation repositories and Administrators of critical benchmarks.
Existing cloud sourcing arrangements should be reviewed by the affected persons and be amended accordingly with taking into account these Guidelines by 31 December 2022.
The Guidelines apply from 31 July 2021 to all cloud sourcing arrangements entered into, renewed or amended on or after this date.
Enhancement of procedures regarding safeguarding of client funds held by CIFs
On 14 July 2021, through the issuance of Circular C458, CySEC wishes to inform CIFs for the amendment of Circular C418 ‘Enhancement of procedures regarding safeguarding of client funds held by CIFs by deleting paragraph 10 of the latter. The new requirements post the deletion were set out in C458 for ease of reference.
ESMA Guidelines on Article 25 of Directive 2011/61/EU
On 26 July 2021, through the issuance of Circular C460, CySEC wishes to inform the AIFMs on the Guidelines issued by the European Securities and Markets Authority (ESMA) on Article 25 of Directive 2011/61/EU (Reference num. ESMA34-32-701 EN).
The Guidelines aim to establish efficient, consistent and effective supervisory practises within the European System of Financial Supervision and ensure the consistent application of Article 25 of the Directive. Additionally, the Guidelines specifically aim to identify and assess by which extend the use of leverage contributes to the build-up of systemic risk in the financial system and ensure the implementation of leverage related measures by the National Competent Authorities (NCA’s).
CySEC has adopted the aforementioned Guidelines and urges all the AIFMs with the obligation to report under Section 31 of the Law, to do so within the set deadlines.
The Guidelines apply from 23 August 2021.
Reporting obligations (‘the AIFMD Reporting obligation’) under articles 4(3)(d) and 31(1), (2) and (4) of the Alternative Investment Fund Managers Law (the ‘AIFM Law’) as further specified with articles 5(3) and 110 of the Commission Delegated Regulation (EU) No 231/2013 with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (‘the Regulation’)
On July 28 2021, through the issuance of Circular C459, CySEC informed AIFMs regarding the AIFMD Reporting obligation, following Circular C404.
AIFMs are required to regularly review policies and procedures in order to ensure compliance under the AIFM Law and Regulation at all times. Specifically, the obligations of AIFMs include the following:
- Valid AIFMD reports to be submitted on time;
- Information provided to be accurate;
- Consistency of information reported within the AIFMD reports and/or between the AIFMD reports submitted by an AIFM;
- Completeness of information;
- Non duplication of reporting.
Additionally, AIFMs are strongly recommended by CySEC to review the relevant regulatory framework, the ESMA Guidelines on reporting obligations under Articles 3(3)(d) and 24(1), (2) and (4) of the AIFMD (the ‘ESMA Guidelines’) and ESMA Questions and Answers on the application of the AIFMD (the ‘ESMA Q&As’).
Announcement regarding the Express Trusts and Similar Legal Arrangements’ Register
On 29 July 2021, CySEC through an announcement informed the general public that it is in the process of enabling the registration of Express Trusts in a new Register through an electronic system pursuant to section 61C of the Prevention and Suppression of Money Laundering and Terrorist Financing Law (L. 188(I)/2007) (‘the Law’).
At a later stage, CySEC will announce the relevant procedure that should be followed for this purpose and clarifies that the current procedure of trusts’ registration in the Trusts’ Registries as per section 25A of the Law Regulating Companies Providing Administrative Services and Related Matters (L.196(Ι)/2012) is still in effect.
