INVESTMENT SERVICES & CAPITAL MARKETS
MiFID/MiFIR
ESMA consults on rules for passporting for investment firms
On 17 November 2022, ESMA published a consultation on the review of the technical standards under Article 34 of MIFID II, covering the provision of investment services across the EU.
The main amendments proposed add the following items to the information that investment firms are required to provide at the passporting stage:
- the marketing means the firm will use in host Member States;
- the language(s) for which the investment firm has the necessary arrangements to deal with complaints from clients from each of the host Member States in which it provides services;
- in which Member States the firm will actively use its passport as well as the categories of clients targeted; and
- the investment firm’s internal organisation in relation to the cross-border activities of the firm.
The cross-border provision of investment services is a key element of the single market of financial services as it fosters competition and expands the offer available to consumers who can choose among a broader number of firms and investment opportunities.
Lately, ESMA and National Competent Authorities (NCAs) have noted the continued increase in cross-border activities to retail clients provided under the MiFID II free provision of services regime. This increase results from several factors, including the development of the single market and the digitalisation of financial services, which further facilitates firms to provide services across borders. The pandemic has also created conditions that contributed to an increase in retail investors’ exposure to securities markets, including cross-border. This is a welcome development, consistent with the objective to develop the single market for financial services in the EU.
However, the increase in cross-border activities by investment firms clearly requires NCAs to increase their focus on the supervision of cross-border activities and on cooperation. A development of cross-border activities which is not accompanied by increased supervisory focus risks undermining investors’ trust and backfiring on the achievement of the single market.
The consultation closes on 17 February 2023. ESMA will consider the feedback it receives to the consultation in Q2 2023 and expects to publish a final report by the end of 2023.
ESMA annual report on waivers and deferrals
On 21 November 2022, published its Annual Report on waivers and deferrals. In the report, ESMA provides a picture of the European trading landscape in 2021, encompassing the net effect of Brexit and the relocation process from the UK to the European Union (EU).
Trading under waivers and deferrals is significant in the EU, specifically for shares and interest rate derivatives. In addition, trading volumes, both in terms of total turnover and in the number of transactions, have significantly increased from 2020 to 2021 for equity instruments as a consequence of Brexit. The report will be submitted to the European Commission.
Market Abuse
ESMA updates Q&As on MAR
On 25 November 2022, ESMA published an updated version of its Q&As on the Market Abuse Regulation (MAR). The Q&A covers the scope of the obligation to detect and report market abuse. The revision makes clear that the obligation applies to, among other firms, investment firms providing direct electronic access (DEA) with respect to their DEA clients’ trading activity.
Central Securities Depositories Regulation
ESMA updates Q&As on CSDR
On 17 November 2022, ESMA published an updated version of its Q&As on the implementation of the CSDR. ESMA has added a Q&A which explains that Central Securities Depositaries (CSDs) should publish the information set out in Annex III of the RTS on settlement discipline on their website for free, on an annual basis, by the end of February of each year. The first publications should take place by the end of February 2023.
ESMA amending RTS on settlement discipline under CSDR
On 21 November 2022, ESMA published a final report on draft RTS amending Article 19 of Commission Delegated Regulation (EU) 2018/1229 supplementing the Central Securities Depositories Regulation (CSDR) with regard to settlement discipline.
The proposed amendment would remove the central counterparty-run separate process for the collection and distribution of cash penalties for settlement fails on cleared transactions. It would put central securities depositaries in charge of the process of collection and distributing all penalties according to Articles 16, 17 and 18 of the same Regulation, establishing a single harmonised process for all transactions (both cleared and uncleared). ESMA will submit the draft RTS to the European Commission for endorsement. Following endorsement, the resulting Delegated Regulation will be subject to the non-objection of the European Parliament and the Council.
FUND REGULATION
Money market funds
ESMA Guidelines on stress testing scenarios under the MMF Regulation
On 30 November 2022, ESMA published the Final Report on the 2022 update of guidelines on MMF stress tests under the Money Market Funds Regulation (MMFR).
The 2022 update of the Guidelines on MMFs stress tests is published in the context of the resurgence of the COVID-19 pandemic, compounded with zero-COVID policies in some regions, uncertainty about the economic consequences of the Russian invasion of Ukraine and geopolitical tensions.
It also reflects the very high risks to ESMA’s remit identified in ESMA Report on Trends, Risks and Vulnerabilities, including risks to MMFs, which experienced a stress episode on the GBP money market in 2022. The calibration takes into account the systemic risks identified in the Warning issued by the ESRB on vulnerabilities in the Union’s financial system. In calibrating the new risk parameters ESMA has worked closely with the European Systemic Risk Board and the European Central Bank.
The new 2022 parameters set out in the updated Guidelines will have to be used for the purpose of the first reporting period following the start of the application of the updated Guidelines. These Guidelines shall be updated at least every year considering the latest market developments.
Liability driven investment funds
ESMA welcomes NCAs work to maintain resilience of liability driven investment funds
On 30 November 2022, via an announcement ESMA welcomed the initiative of two National Competent Authorities’ (NCAs) in relation to Liability Driven Investment Funds (LDI Funds).
On 30 November 2022, the Central Bank of Ireland (CBI), and the Commission de Surveillance du Secteur Financier (CSSF) published letters addressed to LDI fund managers asking them to maintain the current level of resilience and the reduced risk profile of GBP LDI funds. According to these letters, managers wanting to reduce GBP LDI Fund’s yield buffers below the current levels shall inform their NCA in advance and provide a justification. LDI funds denominated in GBP proved to be vulnerable to the volatility surge in the UK gilts market in September 2022. NCAs engaged with GBP LDI Fund managers who subsequently increased the resilience of their funds. ESMA underlines the importance of increasing funds resilience as large and unexpected shocks can unfold rapidly in the current economic conditions.
In that context, ESMA supports coordinated supervisory actions and information sharing among NCAs, as well as converging measures to address risks which may pose a potential threat to financial stability.
PRIIPS
ESAs update Q&As on PRIIPs KID
On 14 November 2022, the ESAs updated their Q&As on the key information document (KID) requirements for packaged retail and insurance-based investment products (PRIIPs), as laid down in Commission Delegated Regulation (EU) 2017/653.
New and updated sections include:
- a “What is this product?” section
- performance scenarios in relation to Articles 3 and 8 and Annexes IV and V
- past performance in relation to Annex VIII
- derivatives
- investment funds; and
- auto-callable products.
The ESAs have indicated that the amendments relating to Commission Delegated Regulation (EU) 2021/2268 are only applicable from 1 January 2023 and that the requirements that will be amended by the Delegated Regulation will remain relevant only until the end of 2022.
Limiting use of leverage
ESMA’s advice on Central Bank of Ireland’s proposed measure to cap leverage use by Irish real estate AIFs.
On 24 of November, ESMA issued its advice on a proposed measure by the Central Bank of Ireland (CBI) communicated to the European Systemic Risk Board. The CBI’s proposed measure consists of imposing a 60% leverage ceiling on AIFs established in Ireland with at least 50% of their AUM directly or indirectly invested in Irish real estate. Irish real estate funds investing at least 80% of their assets in social housing are not in scope of the measures. The CBI imposed the measure as it identified that Irish real estate funds deployed substantially more leverage than other EU AIFs, to such levels that might reverberate across the financial system.
ESMA found the proposed measure appropriate to address concerns.
SUSTAINABLE FINANCE
Greenwashing
European Supervisory Authorities launch joint call for evidence on greenwashing
On 15 November 2022, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a Call for Evidence on greenwashing to gather input from stakeholders on how to understand the key features, drivers and risks associated with greenwashing and to collect examples of potential greenwashing practices.
Due to the growing demand for sustainability-related products and the rapidly evolving regulatory regimes and sustainability-related product offerings, the call is also motivated by the need to better understand which areas may become more prone to greenwashing risks. In addition, the call seeks input on potential greenwashing practices relevant to various segments of the sustainable investment value chain and of the financial product lifecycle.
In the context of this call, the term “greenwashing” is broadly used, recognising that sustainability-related claims can be linked to all aspects of the ESG spectrum. Contributions should focus on greenwashing risks and occurrences arising in the financial sector and affecting financial products or services, which are under the scope of the ESAs.
This Call for Evidence was issued in the context of the mandates received from the European Commission in May 2022. Respondents are invited to submit their responses by 10 January 2023. Contributions will feed into the ESAs’ findings for their progress reports due in May 2023, and final reports due in May 2024.
ESMA consultation on the use in funds’ names of ESG or sustainability-related terms
On 18 November 2022, ESMA published a consultation on draft guidelines on the use in funds’ names of ESG or sustainability-related terms.
Funds’ names are a powerful marketing tool. In order not to mislead investors, ESMA believes that ESG- and sustainability-related terms in funds’ names should be supported in a material way by evidence of sustainability characteristics or objectives that are reflected fairly and consistently in the fund’s investment objectives and policy. ESMA is particularly seeking stakeholders’ feedback on the introduction of quantitative thresholds for the minimum proportion of investments sufficient to support the ESG or sustainability-related terms in funds’ names.
The objective is to ensure that investors are protected against unsubstantiated or exaggerated sustainability claims while providing both NCAs and asset managers with clear and measurable criteria to assess names of funds including ESG or sustainability-related terms.”
The main elements of the consultation paper on draft guidelines for the use of ESG or sustainability-related terms in funds’ names on which ESMA is seeking stakeholders’ feedback are:
- a quantitative threshold (80%) for the use of ESG related words;
- an additional threshold (50%) for the use of “sustainable” or any sustainability-related term only, as part of the 80% threshold;
- application of minimum safeguards to all investments for funds using such terms (exclusion criteria);
- additional considerations for specific types of funds (index and impact funds).
ESMA proposes that the draft guidelines would become applicable from 3 months after the publication of their translation on the ESMA website. Furthermore, a transitional period of 6 months is suggested for those funds launched prior the application date, in order to comply with the Guidelines.
ESMA will consider the feedback it receives to this consultation after it closes on 20 February 2023 with a view to finalising the guidance afterwards.
Sustainable Finance Disclosure Regulation
ESAs review of SFDR Delegated Regulation delayed by up to six months
On 14 November 2022, ESMA published a letter sent by the European Supervisory Authorities (ESAs) to the European Commission to communicate that there will be up to a six month delay in delivering the mandated review of the principal adverse impact indicators (PAI) and financial product disclosures in Commission Delegated Regulation (EU) 2022/1288 (SFDR Delegated Regulation), which is due by 28 April 2023.
The ESAs have identified significant challenges due to the substantial number of technical components to deliver the desired changes, including: (i) in revising and extending the PAI indicators. The ESAs state that they now consider it important to develop a more objective basis to the “do not significantly harm” framework and to expand significantly on the social indicators; and (ii) the need to address issues that were not fully or adequately addressed in the original RTS, such as the treatment of “equivalent information”. The ESAs have also been short on resources, having prioritised the review of the RTS on fossil gas and nuclear energy amendments.
European Supervisory Authorities publish SFDR Q&As
On 17 November 2022, the Joint Committee of the European Supervisory Authorities (ESMA, EIOPA and EBA) published a new set of Q&As on Commission Delegated Regulation (EU) 2022/1288, which supplements the SFDR with regard to RTS on content and presentation of information.
The document includes sections on: (i) current value of all investments in principle adverse impact (PAI) and taxonomy-aligned disclosures; (ii) PAI disclosures; (iii) financial product disclosures; (iv) multi-option products; (v) taxonomy-aligned investment disclosures; and (vi) financial advisers and execution-only financial market participants.
CySEC DEVELOPMENTS
Circular C534: Provision of investment and ancillary services and/or performance of investment activities in third countries
On 29 November CySEC, through the issuance of Circular C534, which replaces Circular C256, informed the CIFs that wish to provide and/or perform investment and ancillary services in third countries, must notify CySEC in writied of their intentions. The notification should include a list of third countries where the CIF intends to provide/perform services and activities as well as the necessary authorisations from the countries’ National Competent Authorities, or conversely if no authorisations are required confirmations for the third country NCAs to that effect. CIFs must record this information on their CIF Record and notify CySEC in writing of any subsequent changes.
All existing and newly established CIFs must declare on their websites the names of all the third countries in which they provide/perform services/activities.
Circular C535: EBA Guidelines on policies and procedures in relation to compliance management and the role and responsibilities of the AML/CFT Compliance Officer under Article 8 and Chapter VI of Directive (EU) 2015/849
On 29 November 2022, CySEC published Circular C535, which reminds CySEC’s regulated entities that the EBA Guidelines on policies and procedures in relation to compliance management and the role and responsibilities of the AML/CFT Compliance Officer under Article 8 and Chapter VI of Directive (EU) 2015/849 will apply as of 1 December 2022.
The Guidelines complement and interplay, but do not replace, various other relevant guidelines issued by the European Supervision Authorities, as these are mentioned in the Circular.
Also, the Guidelines refer to Directive (EU) 2015/849 (the AML Directive). CySEC has included in the Circular a table of equivalence between the articles of the AML Directive and the Law 188(I)/2007-2021 (the AML/CFT Law) which transposes the AML Directive into Cyprus Law.
Circular C536: Requirements of the Portuguese Securities and Exchange Commission (the CMVM) regarding the promotion, distribution, and marketing of PRIIPs and the appointment of tied agents in the territory of Portugal
On 29 November 2022, CySEC issued Circular C536, which reminds CIFs of the two circulars issued by CySEC regarding the requirements of the Portuguese NCA the CNMV for the promotion, distribution and marketing of PRIIPs and the appointment of tied agents in the territory of Portugal (CySEC Circulars C430 and C433, respectively).
Circular C537: New Form CBRT-CIF, Freedom to provide Investment Services and Activities
On 30 November 2022, CySEC issued Circular C537, which introduced the new Form CBRT-CIF. The CBRT-CIF Form must be collected and submitted to CySEC only by CIFs who reach the materiality threshold of 50 retail clients (including retail clients treated as professionals) in at least one host Member State. CIFs are required to submit information on their cross-border activities for the period 01/01/2022 – 31/12/2022. The deadline for submitting this Form is by 15:00 hours on 27 January 2023