INVESTMENT SERVICES & CAPITAL MARKETS
European Commission report on qualification of financial advisors framework
On 7 July 2022, the European Commission published a report, dated 30 June 2022, on the current framework for qualification of financial advisors in the EU, and assessment of possible ways forward. This report examines the feasibility of possible improvements to the quality of financial advice in the EU, as well as the feasibility of setting up a pan-EU label for financial advisors. It analyses the current framework for financial advisors, including the legal framework for qualifications of advisors in MIFID II and the Insurance Distribution Directive, and provides an overview of national requirements regarding knowledge and competence for individuals providing advice, as well as a rationale for improving quality of financial advice at EU level.
Higher retail investor participation in capital markets is crucial to help EU capital markets grow and offer individuals more opportunities to manage their financial situation. However, the European Commission found that despite requirements introduced at EU level, the level of qualifications, knowledge and skills of financial advisors continues to differ across Member States. Accordingly, the report identifies that the specific objectives in this area should be on:
- increasing the level of qualification of financial advisors in the EU, including in relation to sustainability
- aligning standards across Member States and across sectorial legislation in order to ensure consistency
- facilitating cross-border provision of services and recognition of standards.
Several ways forward are identified by the report, but the feasibility of a pan-EU label for advisors is ruled out, notably due to concerns regarding its successful uptake and the likely high administrative costs. The European Commission concludes that options to further strengthen the requirements and standards for advisors at EU level could be further explored, notably as part of the future Retail Investment Strategy.
ESMA consults on MIFID II product governance guidelines following common supervisory action
On 8 July 2022, ESMA issued a consultation on reviewed guidelines on MIFID II product governance guidelines. ESMA proposes updating the 2017 product governance guidelines following several recent regulatory and supervisory developments, including the outcome of the 2021 common supervisory action (CSA) on product governance
The main proposals in the draft guidelines relate to:
- the specification of any sustainability-related objectives a product is compatible with;
- the practice of identifying a target market per cluster of products instead of per individual product (“clustering approach”);
- the determination of a compatible distribution strategy where a distributor considers that a more complex product can be distributed under non-advised sales;
- the periodic review of products, including the application of the proportionality principle.
The Consultation Paper also includes good practices identified in the 2021 CSA to complement the existing guidelines, as well as an additional case study. ESMA believes that these practical examples will help firms comply with the relevant product governance requirements.
The product governance requirements introduced by MIFID II have proved to be one of the most important elements of the MIFID II investor protection framework, aiming at ensuring that firms act in their clients’ best interests during all stages of the investment product’s life cycle and preventing mis-selling. As part of the product governance requirements, a target market of end clients must be identified and periodically reviewed for each product, as well as a distribution strategy that must be consistent with the identified target market.
The consultation closes on 7 October 2022. ESMA will consider the feedback it receives to the consultation in Q4 2022 and expects to publish a final report in Q1 2023.
ESMA identifies data reporting services providers to be supervised directly
On 12 July 2022, ESMA, following the adoption of the European Commission Delegated Act defining the derogation criteria to the principle that data reporting service providers (DRSPs) are subject to ESMA’s supervision, has identified those DRSPs it directly supervises, as well as those derogated entities which remain under the supervision of National Competent Authorities (NCAs) due to their limited relevance for the European Union (EU) market.
On 1 January 2022, ESMA took on its new mandate as direct supervisor of DRSPs. Following the adoption of the Commission Delegated Act in March, ESMA subsequently performed the relevant assessment by considering the cross-border activity and the volumes of transactions reported or published by each individual DRSP.
Based on this assessment, ESMA is the supervisor of the following DRSPs that represent almost 99% of the transactions reported by Authorised Reporting Mechanisms (ARMs) and more than 99% of the transactions published by Authorised Publication Arrangements (APAs):
- AQ Metrics Limited (ARM);
- Tradeweb EU B.V. (APA);
- CBOE Europe B.V. (APA);
- UnaVista TRADEcho B.V. (ARM/APA);
- Bloomberg Data Reporting Services B.V. (ARM/APA);
- MarketAxess Post-Trade B.V. (ARM/APA);
- Krajowy Depozyt Papierów Wartosciowych S.A. (ARM);
- Nasdaq Stockholm AB (APA); and
- Euronext Paris SA (ARM/APA).
The remaining ARMs and APAs are derogated from ESMA supervision and remain subject to NCA supervision. The full list can be viewed in the ESMA Registers.
ESMA corrects double volume cap results
On 12 July 2022, ESMA updated the double volume cap (DVC) results following a data correction submitted by a reporting entity. This data correction impacts the results for five ISINs for which the suspension had been erroneously revoked from 12 July. The suspension of the five ISINs are expected to be resumed from 18 July and end on the suspension end dates provided in ESMA’s update.
European Commission adopts Implementing Regulation on ITS harmonising format of information report under MIFID II
On 14 July 2022, the European Commission adopted an Implementing Regulation laying down ITS on the format in which branches of third-country firms and competent authorities have to report the information referred to in Article 41(3) and (4) of MiFID II, alongside an Annex.
According to Article 41(3) of MIFID II, branches of third-country firms that have been authorised in accordance with Article 41(1) of that Directive are to report to the competent authority of the Member State where that authorisation was granted, on an annual basis, the information laid down in that Article 41(3).
The Implementing Regulation includes rules on the format of the information as well as a timeframe of when that information is to be provided to competent authorities. This Implementing Regulation will enter into force twenty days after its publication in the Official Journal.
ESMA updates Q&As on MIFID II and MIFIR market structures topics
On 15 July 2022, ESMA published an updated version of its Q&As on market structures under MIFID II and MIFIR.
The updated Q&As include the following new questions on algorithmic trading: (i) do orders that are executed through trading functionalities which offer automated managing of the order qualify as algorithmic trading; and (ii) how should firms ensure compliance with the requirements in Article 17 of MIFID II and RTS 6 when using third party systems which offer algorithmic trading functionalities.
ESMA updates Q&As on MIFIR data reporting
On 19 July 2022, ESMA updated its Q&As on complying with reporting requirements under MIFIR. ESMA updated section 19 on the reporting of emission allowances.
ESMA proposes key risk indicators for retail investors
On 29 July2022, ESMA published an article on the development of key retail risk indicators (RRIs) for the EU single market.
The proposed RRIs highlight risks around:
- inexperienced investors;
- use of digital tools by younger investors; and
- spikes in overall trading during periods of market stress.
This development of RRIs is based on the new mandate ESMA recently received in this regard. ESMA is building on existing consumer analysis and indicators from the Trends, Risks and Vulnerabilities Reports to propose a conceptual framework that:
- defines key terms;
- considers how to measure risks practically; and
- identifies sources of risk to consumers.
Within this framework, RRIs should aim to reflect market developments, especially the rise of online- or mobile-based retail trading.
ESMA will continue to refine and develop RRIs to enhance its risk monitoring in this area. The article sets out several possible extensions to the analysis, including broadening the coverage in terms of the products and markets covered, and enhancing the evidence base on investor characteristics.
ESMA AND EBA publish guidelines to harmonise the supervisory review and evaluation process of investment firms
On 21 July 2022, ESMA and the European Banking Authority (EBA) published final Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP) for investment firms.
The guidelines are based on the Investment Firms Directive (IFD) and aim to harmonise the supervisory practices regarding the supervisory review and evaluation process of investment firms.
The final SREP Guidelines have been developed jointly with the EBA. They set out the common process and criteria for the assessment of the main SREP elements, including:
- business model;
- governance arrangements and firm-wide controls;
- risks to capital and capital adequacy; and
- liquidity risk and liquidity adequacy.
The criteria for the assessment of risks in the joint Guidelines follow the requirements of the Investment Firms Regulation and IFD and the procedures and methodologies provided are proportionate to the nature, size and activities of investment firms.
The guidelines will be translated into the official EU languages and published on the ESMA and EBA websites.
ESMA finds NCAs’ scrutiny and approval of prospectuses satisfactory
On 21 July 2022, ESMA published its Peer Review Report on the scrutiny and approval procedures of prospectuses by competent authorities. This peer review also assessed the impact of different approaches regarding scrutiny and approval by national competent authorities (NCAs) on issuers’ ability to raise capital in the European Union.
The Report’s key findings included that:
- NCAs generally scrutinise prospectuses in a satisfactory manner, albeit in various ways, with scrutiny often reinforced for heightened risk prospectuses;
- The notion of additional criteria that NCAs may apply during the scrutiny process lacks clarity, a point which the European Commission is invited to address with ESMA’s technical assistance as needed;
- There is scope for efficiency improvements in respect of some NCAs’ approval processes;
- ESMA Guidelines on risk factors are applied satisfactorily, however there is room for future supervisory convergence work in relation to their enforcement;
- Overall NCAs have sufficient and proportionate resources to scrutinise prospectuses; and
- The liability regime in Italy has a strong impact on how Consob scrutinises and approves prospectuses.
The peer review assessed all NCAs in respect of how they scrutinise and approve prospectuses. The exercise also involved onsite visits to the AMF (France), BaFin (Germany), CBI (Iceland), CONSOB (Italy), CSSF (Luxembourg), SFSA (Sweden) to gain a deeper understanding of how these NCAs scrutinise and approve prospectuses.
ESMA expects to carry out a follow-up assessment in two years to review the level of improvements achieved based on the findings and recommendations of this peer review report.
ECON draft report on proposed Regulation amending MIFIR
On 29 July 2022, the European Parliament’s Economic and Monetary Affairs Committee (ECON) published a draft report on the European Commission’s proposal for a Regulation amending MIFIR as regards enhancing market data transparency, removing obstacles to the emergence of a consolidated tape, optimising the trading obligations and prohibiting receiving payments for forwarding client orders.
ESMA makes new bond liquidity data available and publishes data for the systematic internaliser calculations
On 1 August 2022, ESMA made available the new quarterly liquidity assessment for bonds as well as the data for the systematic internaliser quarterly calculations for equity, equity-like instruments and bonds under MIFID II and MIFIR.
Bonds quarterly liquidity assessment
ESMA published the latest quarterly liquidity assessment for bonds available for trading on EU trading venues. For this period, there are currently 838 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.
ESMA is also publishing two completeness indicators related to bond liquidity data.
The transparency requirements for bonds deemed liquid today will apply from 16 August 2022 to 15 November 2022.
Data for the systematic internaliser quarterly calculations
The data covers the total number of trades and total volume over the period 1 January 2022 to 30 June 2022 for the purpose of the systematic internaliser (SI) calculations under MIFID II for:
- 24,552 equity and equity-like instruments; and
- 128,876 bonds.
Investment firms are required to perform the SI test by 15 August 2022.
The data is made available through:
- the SI register in excel files; and
- through FITRS in the XML files with publication date 1 August 2022 (see here).
The results for equity and equity-like instruments and bonds are published only for instruments for which trading venues submitted data for at least 95% of all trading days over the 6-month observation period. The data publications also incorporate OTC trading to the extent it has been reported to ESMA. The publication includes data for instruments traded or available for trading during the reference period considered.
As announced on 28 June 2022, due to operational constraints ESMA is not publishing the SI regime data for non-equity instruments other than bonds. The non-publication of this data means the mandatory SI regime will not apply from 15 August to 14 November 2022, and investment firms will not need to perform the SI-test for non-equity instruments other than bonds. However, investment firms can continue to opt into the SI-regime in the interim period. The SI-calculations for non-equity instruments other than bonds will resume on 1 November 2022.
European Commission final report on disclosure, inducements, and suitability rules
On 2 August 2022, the European Commission published a final report on disclosure, inducements and suitability rules following the retail investors’ study that it commissioned to feed into the development of its retail investment strategy.
The methodology for this assignment was designed so as to capture the whole process of retail investor decision-making, from searching for information, reviewing information documents to undergoing a suitability assessment/ demands and need test and receiving advice. The objective was the study and analysis of the investment environment the investors are in, with an analysis of the product costs, current practices in advice and product provision. This was then supported by legal research and further analysis.
The primary data collection focused on 15 EU Member States (Austria, Czechia, Germany, Greece, Spain, Finland, France, Ireland, Italy, Latvia, Luxembourg, the Netherlands, Poland, Romania and Sweden). These were selected as to cover a wide range of situations regarding levels of take-up of retail investment products, market characteristics and geographical diversity.
The findings relating to disclosure, inducements and advice, and suitability, demands and needs test are each set out in different chapters, with the findings then analysed under the light of the Better Regulation criteria to understand whether the current legal framework on disclosure, advice, inducements and suitability assessments is relevant, coherent, effective, efficient and has added value for consumer protection. Eight overarching conclusions arise from the study, and these are set out in Chapter 8.
Implementing Regulation on format of insider lists and their updates under MAR
On 14 July 2022, Commission Implementing Regulation (EU) 2022/1210 laying down Implementing Technical Standards for the application of MAR with regard to the format of insider lists and their updates was published in the Official Journal.
The Implementing Regulation reflects the amendments made to MAR by the Prospectus Regulation, which introduced less stringent requirements for issuers whose financial instrument are admitted to trading on an SME growth market by limiting the persons listed to those who, due to the nature of their function or position within the issuer, have regular access to inside information.
Member States may require SME growth market issuers nonetheless to apply the full MAR list, however the Implementing Regulation provides a less administratively burdensome format of the list, limiting the content to what is strictly necessary to identify the relevant individuals.
SME growth market issuers are also exempted from the requirement for issuers to keep the insider list in an electronic format, as long as the completeness, confidentiality and integrity of the information is ensured.
The Implementing Regulation compiles the formats of all insider lists referred to in MAR in one legal act, repealing Implementing Regulation 2016/347. It entered into force on 3 August 2022, 20 days after its publication in the Official Journal.
ESMA call for evidence on pre-hedging
On 29 July 2022, ESMA published a call for evidence on pre-hedging to help it to develop appropriate guidance.
In its final report on the MAR Review, ESMA acknowledged that there are fundamentally different views on pre-hedging. As a follow-up to the MAR Review, ESMA is therefore undertaking an analysis of that practice in the market. In the course of that review, ESMA had made market participants aware that some national competent authorities had received suspicious order and transaction reports on pre-hedging behaviour.
Mixed views were expressed on the usefulness of pre-hedging and the risks associated with this practice. Several market participants asked ESMA to issue guidance on what could be considered as MAR-compliant in terms of pre-hedging activities, and what behaviour might constitute frontrunning. Guidance was also requested on procedural aspects of pre-hedging, such as the documentation required, transparency regarding pre-hedging arrangements by brokers to their clients, and internal policies of market makers.
The call for evidence also discusses the provisions of MiFID II that firms need to comply with when engaging in pre-hedging, and seeks feedback from market participants on how such provisions are currently applied. Particular focus is given to provisions governing conflicts of interest.
The deadline for responses is 30 September 2022.
ESMA stress test of central counterparties finds clearing system resilient
On 5 July 2022, ESMA published the results of its fourth stress test exercise of Central Counterparties (CCPs). The results confirm the overall resilience of European Union CCPs, as well as third-country Tier 2 CCPs, to credit, concentration and operational risks under the tested scenarios and implemented framework. However, the stress test also identified areas where some CCPs may need to strengthen their risk management frameworks, or where further supervisory work should be prioritised, including on concentration and operational risks.
The report’s key findings are:
- CCPs have sufficient buffers to withstand adverse market developments in combination with the default of the two clearing members with the largest exposures;
- Gaps are identified between the necessary and available buffers for concentration risks for some CCPs, particularly in commodity derivatives markets;
- CCPs remained overall resilient despite increased market volatility in the wake of Russia’s invasion of Ukraine;
- For operational risk, differences in terms of risk sources, exposures and mitigation tools across CCPs are observed and need to be further assessed on an individual basis before issuing potential recommendations; and
- Most of the analysed operational events stem from third-party services, whereas a number of critical third-party service providers have the potential to affect the critical functions of multiple CCPs in a correlated manner.
As with previous exercises, the ESMA stress test exercise for CCPs was not aimed at assessing the compliance of the CCPs with regulatory requirements, nor at identifying any potential deficiency of the stress testing methodology of individual CCPs. However, in line with the EMIR mandate, where the assessments expose shortcomings in the resilience of one or more CCPs, ESMA will issue the necessary recommendations.
ESMA reviews clearing and derivatives trading obligations
On 11 July 2022, launched a consultation exploring the extension of the scope of both the Clearing Obligation (CO) and the Derivatives Trading Obligation (DTO).
The proposals contained in the consultation, based on the progress made with the benchmark transition in the interest rate derivative market, introduce additional classes to the scope of the CO and of the DTO. These changes complement the first set of changes developed also in the context of the benchmark transition.
ESMA’s proposal includes for:
- the CO
- the introduction of the overnight indexed swap (OIS) class referencing TONA (JPY);
- the expansion of the maturities in scope of the CO for the OIS class referencing SOFR (USD); and
- for the DTO – the introduction of certain classes of OIS referencing €STR (EUR), which have shown a substantial increase in liquidity over the last months.
Stakeholders, in particular counterparties of OTC derivatives transactions which are subject to the clearing obligation or the derivative trading obligation as well as from CCPs and Trading Venues, are invited to respond to this consultation by 30 September 2022.
Securities Financing Transactions Regulation
Third ESMA statement on implementation of LEI requirements for third-country issuers under SFTR
On 12 July 2022, ESMA issued a third statement on the implementation of Legal Entity Identifier (LEI) requirements for third-country issuers under the Securities Financing Transactions Regulation (SFTR) reporting regime.
ESMA acknowledges the potential reporting implementation issue with respect to securities financing transactions (SFTs) entered into by EU investors for securities of third-country issuers. In particular, in third-country jurisdictions LEIs are not widely mandated beyond dealers of derivatives, therefore a significant number of issuers still do not have an LEI.
Neither ESMA nor national competent authorities (NCAs) possess any formal power to dis-apply a directly applicable EU legal text. Therefore, any change to the application of the EU rules would need to be implemented through EU legislation.
ESMA expects that counterparties, as well as the other entities participating in SFTs, such as agent lenders and tri-party agents that lend, borrow or use as collateral securities issued by third-country entities that do not have an LEI, liaise with those issuers with a view to ensuring that they are aware of the requirements under SFTR. This would further facilitate the use of their securities by the counterparties subject to SFTR reporting requirements. ESMA invites the entities which take part in SFTs reportable under SFTR to make use of the relevant solutions put in place by GLEIF to facilitate LEI coverage such as the use of LEI validation agents.
ESMA maintains its position regarding third-country issuer LEI reporting included in the ESMA statements published on 6 January 2014 and on 13 April 2015. ESMA, therefore, expects that trade repositories would not reject SFT reports of securities without a third-country issuer LEI which are lent, borrowed or provided as collateral in an SFT.
The aforementioned position regarding the validation rules is only relevant to the LEI of third-country issuers. It does not, in any way, affect the mandatory reporting of the LEI in all other cases where it is prescribed by the regulation, including the identification of third-country entities taking part in a SFT.
ESMA expects NCAs to continue not prioritising their supervisory actions in relation to reporting of LEIs of third-country issuers.
ESMA and the NCAs will continue to closely monitor (i) the evolution of the issuance of LEI for third-country issuers, (ii) the population of the field “LEI of the issuer” for third-country entities, as well as (iii) the structural evolution of the SFT markets in the EU, in order to assess on an on-going basis the developments regarding the use of LEI of third-country issuers.
ESMA will give advance notice of at least six months to market participants regarding its position on the reporting of LEI for third-country issuers ahead of the date of application of this requirement in the SFTR validation rules.
ESMA issues this Public Statement to ensure coordinated supervisory actions are taken in response to the aforementioned difficulty in the SFTR application, in particular the requirements regarding third-country issuer LEI reporting.
ESMA updates Q&As on SFTR data reporting
On 19 July 2022, ESMA updated its Q&As on the Regulation on reporting and transparency of securities financing transactions (SFTR). ESMA added new Q&As on the construction of a trade state report, and the reporting of valuation and collateral on the last day of a securities financing transaction.
Central Securities Depositories Regulation
Adoption of Delegated Regulation amending RTS to defer application of CSDR buy-in regime
On 6 July 2022, the European Commission adopted a draft Delegated Regulation amending the Regulatory Technical Standards (RTS) on settlement discipline laid down in Delegated Regulation (EU) 2018/1229 to defer the date of application of the provisions related to the mandatory buy-in regime under the Central Securities Depositories Regulation (CSDR).
The draft Delegated Regulation defers the application of the mandatory buy-in rules for three years, to allow time for the European Commission, the European Parliament and Council of the EU to determine the best way forward to improve settlement efficiency. This is necessary because the CSDR Refit legislative proposal, published by the European Commission in March, includes potential amendments to the mandatory buy-in rules and related Level 2 measures. If neither the Council of the EU nor the European Parliament object to the draft Delegated Regulation, it will enter into force 20 days after its publication in the Official Journal.
ESMA consults on amendments to cash penalty process for cleared transactions under CSDR
On 11 July 2022, ESMA began consulting on an amendment to the cash penalty process for cleared transactions under CSDR.
ESMA seeks to simplify the process of collection and distribution of cash penalties for settlement fails relating to cleared transactions.
ESMA’s proposal consists in removing the separate process established in Article 19 of the Delegated Regulation (EU) 2018/1229 for the collection and distribution of the cash penalties in relation to settlement fails on cleared transactions and letting the Central Securities Depositaries run the entire process of collection and distribution of penalties. Currently, central counterparties are responsible for the collection and distribution of cash penalties for settlement fails on cleared transactions.
The deadline for comments is by 9 September 2022. ESMA intends to publish a final report including an amending RTS to be submitted to the European Commission C by Q4 2022.
ESMA updates CSDR Q&As
On 3 August 2022, ESMA updated its Q&As on the implementation of the Central Securities Depositories Regulation (CSDR). Both changes relate to the section in the Q&As on settlement discipline. ESMA has updated a question on the calculation of cash penalties, and added a new question on the bilateral cancellation facility.
ESMA public statement reminds stakeholders of prospectus supervision under EU Ukraine war sanctions
On 8 July 2022, ESMA published a public statement on prospectus supervision in the context of EU sanctions connected to Russia’s invasion of Ukraine.
The public statement alerts stakeholders to the European Commission’s FAQs, in particular in response to queries whether there is sufficient legal basis to refuse the approval of a prospectus if there are prohibited relationships under EU sanctions or if infringements of EU sanctions are suspected during the prospectus scrutiny and approval process undertaken by National Competent Authorities (NCAs).
The European Commission that infringements of EU sanctions can constitute sufficient legal basis for an NCA to refuse the approval of a prospectus. Issuers submitting a prospectus to an NCA should note that they may receive questions and/or requests for additional documentation from NCAs concerning the areas and parties identified by EU sanctions. These questions or requests for additional information may occur when the prospectus is first submitted or at any time during the scrutiny and approval process.
ESMA will continue to monitor closely developments concerning EU sanctions and will continue to work with supervisors to discuss questions arising from this situation. Any relevant further information will be communicated where necessary.
UCITS Directive and AIFMD
ESMA report on penalties and measures imposed under UCITS Directive and AIFMD in 2021
ESMA notes that broadly, the data gathered under the annual 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 will continue to promote further convergence in the use of sanctioning powers by NCAs across the EU.
ESMA updates Q&As on application of UCITS Directive and AIFMD
On 20 July 2022, ESMA published an updated version of its Q&As on the application of the UCITS Directive, as well as an updated version of its Q&As on the application of the Alternative Investment Fund Managers Directive (AIFMD).
Three new questions have been added to the UCITS Directive Q&As: (i) section X: Depository. New Q&A 7 on the reconciliation frequency for funds trading on a daily basis, and new Q&A 8 on reconciliations with tri-party collateral managers; and (ii) section XIII: Delegation. New Q&A 1 on the responsibility to ensure compliance with the rules governing marketing communications.
Three new questions have also been added to the AIFMD Q&As: (a) section VI: Depositaries. New Q&A 15 and Q&A 16 on reconciliations; and (b) section VIII: Delegation. New Q&A 4 on the responsibility for compliance with requirements for marketing communications.
Sustainable Finance Disclosures Regulation
RTS on content and presentation of sustainability-related disclosures under SFDR
On 25 July 2022, Commission Delegated Regulation was published in the Official Journal, supplementing the SFDR with regard to regulatory technical standards specifying:
- the details of the content and presentation of the information in relation to the principle of ‘do no significant harm’
- the content, methodologies and presentation of information in relation to sustainability indicators and adverse sustainability impact
- the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports
The Delegated Regulation will enter into force on 14 August 2022 (20 days after its publication in the Official Journal). It will apply from 1 January 2023.
ESAs first annual report on extent of voluntary disclosure of principal adverse impact under SFDR
On 28 July 2022, the Joint Committee of the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published the first annual report on the extent of voluntary disclosure of principal adverse impact under Article 18 of the Sustainable Finance Disclosure Regulation (SFDR).
Based on a survey of National Competent Authorities (NCAs), the ESAs have developed a preliminary, indicative and non-exhaustive overview of good examples of best practices, and less good examples of voluntary disclosures.
- the extent of compliance with voluntary disclosures varies significantly across respondents, but, overall, the first disclosures since the application of the SFDR are not very detailed – this is expected to change for the disclosures made for the 2022 reporting period once the SFDR Delegated Regulation applies (please see above)
- there is an overall low level of disclosure on the degree of alignment with the objective of the Paris Agreement – when disclosure of alignment is made, it is often vague
- there is a low level of compliance with the details required for explaining why financial market participants do not take into account the adverse impact of their investment decisions.
The report also includes a set of recommendations for NCAs to ensure appropriate supervision of financial market participants’ practices, such as running regular surveys in their own market to determine whether supervisory entities comply with Article 4 SFDR disclosures.
The ESAs note that future reports will: (a) offer meaningful guidance more generally once the SFDR Delegated Regulation has come into effect; and (b) cover voluntary disclosures under Article 7(1), which will only be fully applicable from 30 December 2022.
European Commission summary report on ESG ratings and ESG factors in credit ratings consultation
On 3 August 2022, the European Commission published a summary report on a targeted consultation on the functioning of the ESG ratings market in the EU and the consideration of ESG factors in credit ratings.
The report focuses on:
- use of ESG ratings and dynamics of the market. The vast majority of respondents declare that they do use ESG ratings and among these, 77% use them ‘very much’, while a smaller share use them ‘a little’. Almost all respondents replied that they value and need transparency in data sourcing and methodologies and timeliness, accuracy and reliability of ESG ratings. The majority of respondents, in total and within each main user group, expect to increase their usage of ESG ratings, at least to some degree but often to a large degree
- functioning of the ESG ratings market. The large majority of respondents (over 84%) consider that the market is not functioning well today. A large majority of respondents consider that the lack of transparency on the methodologies used by the providers is a problem in the ESG ratings market, and that there are significant biases with the methodology used by providers, with the market prone to potential conflicts of interests
- intervention in the ESG ratings market. Almost all respondents (94%) consider that intervention is necessary, of which the large majority (80%+) support a legislative intervention with the remainder supporting the development of non-regulatory intervention in the form of guidelines or a code of conduct. The vast majority of respondents (82%) consider that ESG rating providers should be subject to some form of authorisation/registration regime in order to offer their services in the EU
- incorporation of ESG factors in credit ratings. Credit ratings are used by the large majority of respondents for investment decisions (48 out of 55), but they are only decisive for 9% of respondents; they are rather one of many sources of information (for 51%) or a starting point (for 13%).On the other hand, most respondents do find that the level of disclosures as to which credit ratings actions have been influenced by sustainability factors has improved sufficiently, with some laggards
- intervention in the credit ratings market. Slightly more respondents consider that the current trends in the market are sufficient to ensure that Credit ratings agencies incorporate relevant ESG factors in credit ratings (52 out of 101), than those who disagree. As far as enabling users’ understanding of how ESG factors influence credit ratings is concerned, the majority (72%) do not consider market trends and ESMA guidelines to be sufficient. However, out of those who do not consider the current situation sufficient, the majority favours a non-legislative approach. ESMA publishes results of its call for evidence on ESG ratings
EU Taxonomy Regulation
European Parliament does not object to inclusion of nuclear and gas as environmentally sustainable economic activities
On 6 July 2022, the European Parliament did not object to the Commission’s Taxonomy Delegated Act to include specific nuclear and gas energy activities, under certain conditions, in the list of environmentally sustainable economic activities covered by the so-called EU Taxonomy.
As the European Commission believes there is a role for private investment in gas and nuclear activities in the green transition, it has proposed the classification of certain fossil gas and nuclear energy activities as transitional activities contributing to climate change mitigation. The inclusion of certain gas and nuclear activities is time-limited and dependent on specific conditions and transparency requirements.
According to the press release, 278 MEPs voted in favour of the resolution, 328 against and 33 abstained. An absolute majority of 353 MEPs was needed for the European Parliament to veto the European Commission’s proposal. If neither the European Commission, nor the Council of the EU object to the proposal by 11 July, the Taxonomy Delegated Act will enter into force and apply as of 1 January 2023 (please see item below).
Delegated Regulation on specific public disclosures for gas and nuclear activities
On 15 July 2022, Commission Delegated Regulation (EU) 2022/1214 amending Delegated Regulation (EU) 2021/2139 as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities was published in the Official Journal.
The Delegated Regulation sets out the conditions under which nuclear and natural gas energy activities can be included in the list of economic activities covered by the EU Taxonomy Regulation.
It also amends Commission Delegated Regulation (EU) 2021/2178 to require large listed non-financial undertakings and financial undertakings to disclose the amount and proportion of their activities linked to natural gas and nuclear energy.
The Delegated Regulation will enter into force on 4 August 2022, 20 days after its publication in the Official Journal, and will apply from 1 January 2023.
Circular C521: Updated version of the ESMA Guidelines on stress test scenarios under the MMF Regulation.
On 1 July 2022 the CySEC through the issuance of Circular C521 reminded AIFMs and UCITS Management Companies of the updated version of ESMA’s Guidelines on stress test scenarios under the MMF Regulation (“the Guidelines”), issued on 4 May 2021. This Circular replaces Circular C466 on the same topic.
The Guidelines apply in relation to Article 28 of the MMF Regulation and establish common reference parameters for the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs pursuant to that article. The Guidelines applied from 4 June 2022 with respect to the parts in the Guidelines shown in red, whilst the remaining parts of the Guidelines already apply from the dates specified in Articles 44 and 47 of the MMF Regulation.
The CySEC urges the Regulated Entities to whom these Guidelines apply, to make every effort to comply.
Directive DI87-01(A) for the Safeguarding of Financial Instruments and Funds belonging to Clients.
On 26 July 2022 the CySEC published on its website Directive DI87-01(A) (in Greek only) which is the Cypriot transposition of the Commission Delegated Directive (EU) 2021/1269, amending the Commission Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into the product governance obligations.
Summary of main changes:
- Investment firms manufacturing and distributing financial instruments should consider sustainability factors in the product approval process of each financial instrument and in other product governance arrangements for each financial instrument that is intended to be distributed to clients who seek financial instruments with a sustainability-related profile.
- Investment firms should identify at a sufficiently granular level the potential target market for each financial instrument and specify the type of clients with sustainability-related objectives that the product is compatible with.
- Investment firms are required to take sustainability-related objectives into consideration when reviewing the investment products that they offer.
- Distributors should present the sustainability factors of a financial instrument in a transparent manner.
The amending Directive DI87-01(A) shall come into effect on 22 November 2022.
DI78-2012-03(C) on the organization, structure and the business activities of the Management Company, the conflicts of interests, the risk management as well as the content of the agreement between the Management company and the Custodian.
On 26 July 2022 the CySEC published on its website Directive DI78-2012-03(C) (in Greek only) which is the Cypriot transposition of the Commission Delegated Directive (EU) 2021/1270, amending Directive 2010/43/EU as regards sustainability risks and sustainability factors to be taken into consideration for Undertakings for Collective Investment in Transferable Securities (UCITS).
Summary of main changes:
- Management companies shall integrate sustainability risks in the management of UCITS, taking into consideration the nature, scale and complexity.
- Management companies shall identify those types of conflicts of interest that may arise as a result of the integration of sustainability risks in their processes, systems and internal controls.
- Management companies are obliged to consider principal adverse impacts of investment decisions on sustainability factors and are obliged to disclose how their due diligence procedures take those adverse impacts into account.
- Risk management policies shall include the necessary procedures to enable management companies to assess the exposure to sustainability risks for each UCITS they manage.
The amending Directive DI78-2012-03(C) came into effect on 1 August 2022.