INVESTMENT SERVICES & CAPITAL MARKETS
MIFID/MIFIR
ESMA Public Statement on MIFID II
On 13 January 2021, ESMA issued a Public Statement to remind firms of the MiFID II requirements on the provision of investments services to retail or professional clients by firms not established or situated in the European Union (EU).
With the end of the UK transition period on 31 December 2020, some questionable practices by firms around reverse solicitation, where the product or service is marketed at the client´s own exclusive initiative, have emerged. For example, some firms appear to be trying to circumvent MiFID II requirements by including general clauses in their Terms of Business or through the use of online pop-up “I agree” boxes whereby clients state that any transaction is executed on the exclusive initiative of the client.
ESMA reminds firms that “where a third-country firm solicits clients or potential clients in the Union or promotes or advertises investment services or activities together with ancillary services in the Union, it should not be deemed as a service provided at the own exclusive initiative of the client”. This is true “regardless of any contractual clause or disclaimer purporting to state, for example, that the third country firm will be deemed to respond to the exclusive initiative of the client”.
ESMA also highlights that:
- the provision of investment services in the EU without proper authorisation in accordance with the EU and the national law applicable in Member States exposes service providers to the risk of administrative or criminal proceedings, for the application of relevant sanctions; and
- when using the services of investment service providers which are not properly authorised in accordance with EU and Member States’ law, investors may lose protections granted to them under EU relevant rules, including coverage under the investor compensation schemes in accordance with Directive 97/9/EC.
MIFID II “Quick Fix”
On 25 January, the European Parliament updated its procedure file on the proposed Directive amending MiFID II to help the EU’s economic recovery from the Covid-19 pandemic, including changes to investor protection requirements and position limits regime. The update indicates that the EP will consider the proposed Directive during its plenary session to be held from 8 to 11 February. Expected to apply March 2022, with regulatory forbearance in the interim.
ESMA updates Q&As on the implementation of investor protection topics under MiFID II/MiFIR
On 22 December, ESMA published updated Q&As on the implementation of investor protection topics under MiFID II/MiFIR.
The update includes a new Q&A on ‘Information on costs and charges’ that aims to give guidance on how firms can present ex-post costs and charges information to clients in a fair, clear and not misleading manner. In particular, the information should be presented: (i) through a standalone document (which could still be sent together with other periodic documents to clients); or (ii) within a document of wider content, provided that it is given the necessary prominence to allow clients to find it easily.
ESMA consults on MiFID II/MiFIR review report on algorithmic trading
On 18 December, ESMA published a consultation paper which adopts a holistic approach to algorithmic trading under MiFID II and reviews all related provisions together with the aim of having the current framework operating more efficiently. The deadline for comments is 12 March 2021.
Securities Financing Transactions Regulation (SFTR)
ESMA updates SFTR Q&A
On 28 January 2021, ESMA updated its Questions and Answers related to reporting under the Securities Financing Transactions Regulation (SFTR).
The Q&As were updated to clarify:
- reporting of events that were not duly reported on time
- updates to records of outstanding SFTs by the Trade Repositories based on reports made by the counterparties
- operational aspects concerning the reporting by financial counterparties on behalf of small non-financial counterparties pursuant to the Article 4(3) of SFTR.
SFTR transaction reporting obligation by non-financial counterparties
SFTR mandates reporting of all Securities Financing Transactions to a registered Trade Repository within particular deadlines applicable to different entities. The reporting obligation for all non-financial counterparties came into force on 11 January 2021.
Central Securities Depositary Regulation (CSDR)
Settlement discipline delayed to 1 February 2022
On 27 January, a Delegated Regulation amending Delegated Regulation (EU) 2018/1229 (which supplements the CSDR concerning the RTS on settlement discipline) as regards its entry into force, was published in the OJ. The Delegated Regulation provides a further one-year deferral of the current entry into force of Delegated Regulation (EU) 2018/1229, namely to 1 February 2022. The Regulation will enter into force on 30 January. The RTS on settlement discipline cover measures to prevent and address settlement fails including:
- rules for the trade allocation and confirmation process;
- cash penalties on failed transactions;
- mandatory buy-ins; and
- monitoring and reporting of settlement fails.
EMIR
ESMA updates EMIR Q&A
On 28 January 2021, ESMA updated its Questions and Answers document on practical questions regarding reporting issues under the European Markets Infrastructure Regulation (EMIR).The updated Trade Repository (TR) Q&A 3b explains how to report the direction of derivatives in specific cases that are described.
A new Q&A for Trade Repositories clarifies the steps to be taken for the due termination of derivatives when the reporting counterparty ceases to exist. It also specifies how to deal with non-terminated reports of inactive (dissolved) counterparties to ensure that accurate information is provided to the authorities.
European Commission adopts Delegated Regulations on risk management and clearing obligation under EMIR
On 21 December, the European Commission adopted two Delegated Regulations under EMIR. Firstly, the European Commission adopted a Delegated Regulation that amends technical standards as regards to the timing of when certain risk management procedures will start to apply for the purpose of the exchange of collateral. The amendments relate to the treatment of physically settled foreign exchange (‘FX’) forward and swap contracts, intragroup contracts, equity option contracts and the implementation of the initial margin requirements.
Secondly, the European Commission adopted a Delegated Regulation that amends regulatory technical standards as regards the date at which the clearing obligation takes effect for certain types of contracts. Under Article 4(2) of EMIR, intragroup transactions may be exempted from the clearing obligation. The amendments in the adopted Delegated Regulation propose to extend the exemption for intragroup transactions in order to allow more time for the European Commission to adopt the necessary equivalence decisions – the European Commission notes that it would be detrimental to EU firms and economically unjustified to let this exemption expire abruptly.
ESMA publishes draft technical standards under EMIR REFIT
On 17 December 2021, ESMA published a Final Report on technical standards (RTS and ITS) under the EMIR REFIT Regulation. The report covers data reporting to Trade Repositories (TRs), procedures to reconcile and validate the data, access by the relevant authorities to data and registration of the TRs.
This final report and draft RTS and ITS largely reflect the original proposals included in the consultation paper and focuses on further harmonisation of the reporting requirements as well as enhancements in the counterparties’ and TRs’ procedures on ensuring data quality.
The key proposals included in the technical standards are (i) alignment with international standards; (ii) end-to-end reporting in ISO 20022 XML; (iii) harmonised data quality requirements across TRs; (iv) simplified rules for extension of registration from SFTR to EMIR; and (v) Standardised process for data access.
MAR
ESMA annual report on the application of accepted market practices (AMPs) in accordance with MAR
On 16 December, ESMA published its annual report on the application of AMPs in accordance with MAR. The report covers the second semester of 2019 and the first semester of this year, including the last outstanding AMP established under the Market Abuse Directive, terminated over the reporting period.
ESMA states that for the first time since MAR entered into force, there are no longer outstanding accepted market practices in Europe operating under the Market Abuse Directive (MAD). The report provides: (i) a general description of the legislative framework concerning the adoption of accepted market practices under MAR and of the ESMA Opinion on points for convergence in relation to MAR accepted market practices on liquidity contracts; (ii) information about the accepted market practices established in the EU both under MAD and MAR; and (iii) information on the legal status of MAD and MAR, as well as data on their application in practice. The report will be submitted to the EC.
ESMA third annual report on the administrative and criminal sanctions and other administrative measures issued under MAR
On 16 December, ESMA published its third annual report on the administrative and criminal sanctions and other administrative measures issued under MAR in 2019. Specifically, the report covers information on: (i) background and relevant regulatory framework for reporting on MAR administrative and criminal sanctions and other administrative measures; (ii) sanctions and measures imposed; (iii) guidance for interpretation of penalties and measures reported; and (iv) sanctions imposed by national competent authorities (NCAs) – in particular, overviews of the administrative sanctions and measures imposed in 2019.
Other developments
ESMA guidelines on outsourcing to cloud service providers
On 18 December, ESMA published a final report on its guidelines on outsourcing to cloud service providers. ESMA states that the purpose of the guidelines is to help firms identify, address and monitor the risks that may arise from their cloud outsourcing arrangements and to support a convergent approach to the supervision of cloud outsourcing arrangements across competent authorities in the EU. The report provides an overview of the feedback received through the responses to ESMA’s consultation on the proposed draft Guidelines which closed on 1 September and explains how ESMA took the feedback that it received into account. It also contains the final set of Guidelines on outsourcing to cloud service providers. The Guidelines will be translated in the official EU languages and published on ESMA’s website – the publication of the translations will trigger a two month period during which national competent authorities (NCAs) must notify ESMA whether they comply or intend to comply with the guidelines.
ESMA updates Q&As on Prospectus Regulation
On 28 January, ESMA published updated Q&As on the Prospectus Regulation, including six new Q&As. The Q&As provide clarification on the following aspects: (i) order of information in a prospectus; (ii) financial information which only covers short periods; (iii) use of the same prospectus to make several offers; (iv) disclosure requirements concerning statements prepared by an expert; (v) application of an exemption from the obligation to publish a prospectus in Article 1(5) of the Prospectus Regulation; and (vi) which disclosure annexes should be applied when drawing up a prospectus.
ESMA renews decision requiring net short position holders to report positions of 0.1% and above
On 17 December, ESMA renewed its decision to temporarily require the holders of net short positions in shares traded on an EU regulated market, to notify the relevant national competent authority (NCA) if the position reaches, exceeds or falls below 0.1% of the issued share capital. The measure applies from 19 December 2020 for a period of three months until 19 March 2021. ESMA notes that the EFTA Surveillance Authority, in co-operation with ESMA, has adopted a corresponding decision applicable to EEA EFTA states’ markets.
FINANCIAL CRIME AND ANTI-MONEY LAUNDERING
Brexit
UK government revises guidelines on mutual legal assistance
On 14 January, the government published revised guidance on mutual legal assistance (MLA) and European Investigation Order (EIO) requests in response to the end of the Brexit transition period. MLA is a method of cooperation between states for obtaining assistance in the investigation or prosecution of criminal offences. MLA is generally used for obtaining material that cannot be obtained on a police cooperation basis, particularly enquiries that require coercive means. The government notes that following the end of the Brexit transition period, the UK is no longer part of the EIO procedures. Instead, mutual legal assistance requests from EU Member States are based on the Council of Europe’s 1959 European Convention on Mutual Assistance in Criminal Matters and its two additional protocols as supplemented by the EU-UK Trade and Cooperation Agreement.
FUND REGULATION
UCITS
ESMA launches a common supervisory action with NCAs on the supervision of costs and fees of UCITS
On 6 January 2021, ESMA launched a Common Supervisory Action (CSA) with national competent authorities (NCAs) on the supervision of costs and fees of UCITS, be conducted during 2021. The CSAs aim is to assess the compliance of supervised entities with the relevant cost-related provisions in the UCITS framework, and the obligation of not charging investors with undue costs. For this purpose, the NCAs will take into account the supervisory briefing on the supervision of costs published by ESMA in June 2020. The CSA will also cover entities employing Efficient Portfolio Management (EPM) techniques to assess whether they adhere to the requirements set out in the UCITS framework and ESMA Guidelines on ETFs and other UCITS issues. The work will be done on the basis of a common methodology developed by ESMA.
Sustainable Finance Disclosure Regulation (SFDR)
Priority issues relating to SFDR application – European Supervisory Authorities letter to European Commission
ESMA published a letter (dated 7 January 2021) to the European Commission, on several important areas of uncertainty in the interpretation of SFDR.
The letter explains that while many of these interpretative uncertainties of SFDR may be clarified in due course, the ESAs have identified certain priority questions pertaining to the SFRD that would benefit from a more urgent clarification to facilitate an orderly application of SFDR from 10 March 2021: (i) the application of SFDR to non-EU Alternative Investment Fund Managers (AIFMs) and registered AIFMs; (ii) application of the 500-employee threshold for principal adverse impact reporting on parent undertakings of a large group; (iii) the meaning of “promotion” in the context of products promoting environmental or social characteristics; (iv) the application of Article 9 of SFDR; and (v) the application of SFDR product rules to portfolios and dedicated funds.
ESAs Final Report and draft RTS on disclosures under SFDR
On 4 February 2021, the European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) delivered to the European Commission the Final Report, including the draft Regulatory Technical Standards (RTS), on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR).
The proposed RTS aim to strengthen protection for end-investors by improving Environmental, Social and Governance (ESG) disclosures to end-investors on the principal adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. This will help to respond to investor demands for sustainable products and reduce the risk of greenwashing.
The European Commission is expected to endorse the RTS within 3 months of their publication. While financial market participants and financial advisers are required to apply most of the provisions on sustainability-related disclosures laid down in the SFDR from 10 March 2021, the application of the RTS will be delayed to a later date according to the EC letter to the ESAs. The ESAs have proposed in these draft RTS that the application date of the RTS should be 1 January 2022. The ESAs plan to issue a public supervisory statement before the application date of SFDR in order to achieve an effective and consistent application of the SFDR’s requirements and consistent national supervision of the SFDR.
CROSS-BORDER DISTRIBUTION OF FUNDS
ESMA finalises rules on standardised information to facilitate cross-border distribution of funds
ESMA published a final report on implementing technical standards (ITS) under the Regulation on cross-border distribution of funds. The ITS focus on the publication of information by national competent authorities (NCAs) on their websites, the notification of information by NCAs to ESMA and the publication of information by ESMA on its website.
The final report and draft ITS largely reflect the original consultation proposals, focused on the information to be published on NCAs websites regarding the national rules governing marketing requirements for funds, and the regulatory fees and charges levied by NCAs in relation to fund managers’ cross-border activities.
The draft ITS also include provisions on the communication of information by NCAs to ESMA for the purpose of developing and maintaining a central database listing UCITS and AIFs marketed cross-border on ESMA’s website.
UK DEVELOPMENTS
FCA speech LIBOR – are you ready for life without LIBOR from end-2021?
On 26 January, the FCA published a speech by Edwin Schooling Latter, Director Markets and Wholesale Policy at the FCA, on being ready for life without LIBOR. Highlights are:
- 85% of uncleared UK derivatives market is ready for the end of LIBOR as 12,500 firms sign the ISDA protocol
- the IBA consultation on proposed end-dates for the 35 LIBOR currency tenor settings has now closed, opening the way to determining and announcing the future path for all five LIBOR currencies simultaneously
- users of LIBOR should press ahead with transition plans in their new business and their legacy LIBOR books.
Statement on use of the Temporary Transitional Power to modify the UK’s derivatives trading obligation
On 31 December, the FCA published a statement on its use of the Temporary Transitional Power (the TTP) to modify the UK’s derivatives trading obligation (the UK DTO) so that where firms that are subject to the UK DTO trade with, or on behalf of, EU clients that are subject to the EU DTO, they will be able to transact or execute those trades on EU venues subject to certain conditions being met. This modification of the application of the UK DTO applies to UK firms, EU firms using the UK’s temporary permissions regime (TPR), and branches of overseas firms in the UK. The FCA will consider by 31 March 2021 whether market or regulatory developments warrant a review of its approach.
CySEC Developments
Regulation (EU) No 2017/2402 on creating a single framework for Simple Transparent and Standardised (STS) securitisation
On 2 December 2020, through the issuance of Circular C419, the CySEC reminded regulated entities of the main provisions of Regulation EU 2017/2402 and on the STS criteria. The CySEC further reminder regulated entities that the Regulation applies to all securitisations that were issued or to all securitisation positions created after 1 January 2019.
The CySEC informed that it expects regulated entities to review their total pool of investments to determine whether they have exposures to positions that constitute a securitisation within the meaning of the Regulation and make the necessary arrangements as necessary.
Suspension of redemption of UCITS and AIF units on 24 December 2020
On 9 December 2020 the CySEC through the issuance of Circular C420 instructed that on 24 of December 2020 the redemption of units of UCITS and AIFs whose net assets are calculated on a daily basis and that hold assets in transferable securities listed in regulated markets, is suspended. The CySEC issued the suspension as 24 of December is a public holiday in most international stock markets and considered the need to safeguard the interest of fund unit holders and the proper functioning of the market
ESMA Guidelines on performance fees in UCITS and certain types of AIFs
On 15 of December 2020 CySEC through the issuance of Circular C422 reminded UCITS and AIFs as well as their Managers that ESMA’s Guidelines on performance fees in UCITS and certain types of AIF, apply from 5 January 2021.
CySEC expects affected entities to implement the Guidelines for any new fund created after 5 January or for any fund that will introduce a performance fee after the aforesaid date. CySEC further expects that funds that had a performance fee in place before 5 January 2021 will comply with the Guidelines by the beginning of the financial year following 6 months from the application date of the Guidelines.
Policy statement on launching a Temporary Permission Regime for the provision of Investment Services to Professional Clients and Eligible Counterparties based in Cyprus, by UK Firms – Amendment of Directive DI87-04
On 22 December 2020, the CySEC published its Policy Statement PS-02-2020 on the issue of UK Firms offering services to Cyprus based Professional Clients and ECPs post Brexit. The CySEC had identified that a number of UK Firms offered services as Liquidity Providers or had trading arrangements with Cyprus Investment Firms. The CySEC emphasized that where such contracts/or arrangements were established on a solicited basis and not as a result of reverse solicitation, they will need to be terminated upon Brexit, as there is no agreement on the crossborder provision of investment services between the UK and EU.
Considering the aforementioned and in order to avoid market disruptions, the CySEC decided on the establishment of a Temporary Permissions Regime (the “CyTPR”) whereby UK investment firms interested to continue servicing Cyprus based ECPs and Professional clients, post Brexit, without having a physical presence in Cyprus were invited to submit a notification to CySEC no later than 31 December 2020.
The CySEC further emphasized that from 01 January 2022 UK Firms that provide services benefitting from the CyTPR and who wish to continue servicing Professional Clients and ECPs in Cyprus should establish at least a branch in Cyprus. To this end on 30 December 2020 the CySEC published the amended Directive DI87-04 for the provision of investment services by third-country firms to Eligible Counterparties and Professional Clients, providing the legal basis for the CyTPR.
CySEC extends the deadline for the submission of notifications by UK firms who wish to make use for the Temporary Permission Regime
On 28 January 2021, the CySEC announced via a Press Release that it has decided to extend the notification deadline for UK firms interested to register to the CyTPR. The new notification deadline was set till 28 February 2021. The CySEC announced that it has received a substantial number of notifications and acknowledged that the notification inflow justified the deadline extension in order to facilitate a smooth post Brexit transition. Moreover the CySEC announced that it has amended Policy Statement PS-02-2020 and Directive DI87-04 to reflect the notification deadline change.