INVESTMENT SERVICES & CAPITAL MARKETS
MiFID/MiFIR
Delegated Regulation lowering notification of significant net short positions published in the Official Journal
On 11 January 2022, Commission Delegated Regulation (EU) 2022/27 amending the Short Selling Regulation as regards the adjustment of the relevant threshold for the notification of significant net short positions in shares was published in the Official Journal.
The notification threshold for net short positions was temporarily lowered to 0.1% (and each 0.1% above that) of issued share capital by means of an emergency intervention by ESMA following the March 2020 market turmoil.
Due to (among other factors) ongoing instability and the increased transparency and monitoring made possible by the lower threshold, ESMA and the European Commission agreed that the temporary measure should be made permanent. It will enter into force on 31 January 2022 (20 days after its publication).
European Commission adopts Delegated Regulation on stricter methodology to calculate bond liquidity and SSTI of non-equity instruments
On 13 January 2022, the European Commission published a draft Delegated Regulation amending the regulatory technical standards (RTS) as regards adjustment to the liquidity thresholds and trade percentile used to determine the size specific to the instrument applicable to certain non-equity instruments under MIFIR.
These RTS introduced a phased approach with regard to the methodology to calculate the liquidity of bonds and, with regard to pre-trade transparency, the size specific to the instrument (SSTI) of non-equity instruments, including bonds.
Both liquidity and SSTI are relevant for the application of transparency waivers and deferrals. Illiquid instruments are eligible for pre-trade transparency waivers and for post-trade transparency deferrals.
When the size of an order is above the SSTI then a pre-trade waiver is available in case the order is placed through a so called ‘request-for-quote’ or ‘voice trading’ system, and a post-trade deferral, regardless of the trading systems that is being used.
The draft Delegated Regulation aims to realise a move to a stricter phase 3: (i) for the liquidity assessment of bonds the average daily notional amount traded will be decreased from 10 to 7; and (ii) for SSTI the threshold above which a pre-trade transparency waiver is available will be increased from EUR 400,000 to 600,000 for corporate bonds and EUR 900,000 to 1.5 million for sovereign bonds.
The draft Delegated Regulation will be submitted to the European Parliament and the Council for their approval.
ESMA supervisory briefing on using tied agents under MIFID II
On 2 February 2022, ESMA published a supervisory briefing setting out its supervisory expectations in relation to firms providing investment services and/or performing investment activities through the use of tied agents under MIFID II.
Following the UK withdrawal from the EU, ESMA has been monitoring the behaviour of firms in order to understand whether their interaction with EU-based clients is done in a way that is compliant with the MIFIR and MIFID legislation – including the regimes providing the conditions for third-country firms to provide investment services and activities in the Union.
In this context, some practices concerning investment firms using tied agents recently emerged as a potential source of circumvention of the legal framework. ESMA believes that these issues have a more general relevance, and it is thereby important to identify the supervisory expectations on firms using tied agents in a convergent manner across the Union.
Therefore, this supervisory briefing takes into account all cases where an EU firm uses tied agents; a specific focus is given to cases where tied agents are legal persons that are controlled or have close ties with other entities or third-country entities. This supervisory briefing covers: (i) the supervisory expectations when firms appoint tied agents; and (ii) the supervisory expectations on firms using tied agents in their on-going activities.
ESMA requires to report net short positions between 0.1% and 0.2% during transition
On 26 January 2022, published a statement to clarify how to report net short positions (NSPs) between 28 and 31 January 2022 when the reporting threshold changes from 0.2% to 0.1%.
The last day of application of the old reporting threshold (0.2%) will be in relation to Friday, 28 January 2022, with NSPs to be reported to RCAs by 15.30 of the following trading day, i.e. Monday, 31 January 2022.
From Monday, 31 January 2022 onwards, position holders will have to report when their NSPs in shares exceed or are equal to 0.1% of the issued share capital and each 0.1% above that.
The statement requires position holders to report NSPs between 0.1% and 0.2% on the day of application of the 0.1% reporting threshold, even where they were entered into ahead of that date. This is to give Relevant Competent Authorities the full picture of NSPs above the new threshold, which otherwise would be incomplete.
Reporting entities are invited to read the statement which also provides for practical examples on when and how to report.
ESMA consults on trading venue perimeter
On 28 January 2022, ESMA published a consultation paper containing proposals aimed at clarifying the MIFID II provisions relating to multilateral systems and the trading venue authorisation perimeter.
The consultation closes on 29 April 2022. ESMA will consider the feedback received to the consultation and publish a final report in Q3 2022.
ESMA consults on the review of MIFID II suitability guidelines
On 27 January 2022, ESMA launched a consultation on certain aspects of suitability requirements under MIFID II, in order to update its guidelines following amendments to MIFID II relating to sustainability.
The assessment of suitability is one of the most important protections for investors under MIFID II and applies to the provision of all types of investment advice (whether independent or not) and portfolio management.
The main amendments introduced to the MIFID II Delegated Regulation and reflected in the guidelines on the topic of sustainability are:
- Collection of information from clients on sustainability preferences – Firms will need to collect information from clients on their preferences in relation to the different types of sustainable investment products to what extent they want to invest in these products
- Assessment of sustainability preferences – Once the firm has identified a range of suitable products for client, in accordance with the criteria of knowledge and experience, financial situation and other investment objectives, it shall identify – in a second step – the product(s) that fulfil the client’s sustainability preferences
- Organisational requirements – Firms will need to give staff appropriate training on sustainability topics and keep appropriate records of the sustainability preferences of the client (if any) and any updates of these preferences.
The consultation closes on 27 April 2022. ESMA will consider the feedback it receives to the consultation in Q2 2022 and expects to publish a final report in Q3 2022.
ESMA Q&A on MIFID II and MIFIR transparency topics
On 28 January 2022, ESMA updated its Q&As on MIFID II and MIFIR transparency topics. The update includes a new question on the responsibility to verify the double volume cap mechanism.
Market Abuse
ESMA issues 2021 report on accepted market practices under MAR
On 18 January 2022, ESMA published its annual report on the application of accepted market practices (AMPs) in accordance with the Market Abuse Regulation (MAR).
The number of liquidity contracts and the volumes traded under the AMPs has decreased for the four NCAs that have them in place (CNMV, CMVM, CONSOB and AMF) from June 2020 to June 2021, with only a marginal number of contracts operational under the Italian and Portuguese AMPs.
The Report will now be submitted to the European Commission. It will help ESMA’s ongoing work in fostering supervisory convergence in the application of MAR and contribute to ESMA’s goal of developing an EU outcome-focused supervisory and enforcement culture.
EMIR
ESMA recommends clearing obligation for pension funds to start in June 2023
On 1 February 2022, ESMA published a letter dated 25 January, it sent to the European Commission providing its views on the clearing obligation for pension scheme arrangements (PSA) under EMIR, and recommending the end of the current exemption from the clearing obligation with a one year implementation period.
In the letter, ESMA, following its assessment, concludes that PSAs are largely operationally ready to clear their OTC derivatives. However, there are a number of considerations that would justify providing sufficient time before the clearing obligation would start applying to PSAs. In particular, PSAs and the relevant market participants need sufficient time to finalise their clearing and collateral management arrangements in order to absorb the important additional cleared volume corresponding to PSAs’ OTC interest rate derivative trading activity that is not yet voluntarily cleared.
In addition, the start of the clearing obligation for PSAs should be considered in the context of the broader plan to build clearing capacity in the EU and reduce reliance on UK CCPs.
Therefore, ESMA recommends applying the clearing obligation to PSAs from 19 June 2023. Based on ESMA’s recommendation, the European Commission will decide on whether to grant the suggested extension of the exemption until June 2023.
Securities Financing Transactions Regulation (SFTR)
ESMA Q&A on data reporting
On 25 January 2022, ESMA updated its Q&A on SFTR data reporting. Question 2 on reporting of settlement fails was amended.
FINANCIAL CRIME
Anti-money laundering and countering the financing of terrorism
European Commission adopts Delegated Regulation amending list of high-risk third countries
On 7 January 2022, the European Commission adopted a Delegated Regulation that amends the list of high-risk third countries with strategic anti-money laundering and counter-terrorist financing (AML and CTF) deficiencies produced under Article 9(2) of Fourth Money Laundering Directive (MLD4).
The Delegated Regulation: (i) adds Burkina Faso, Cayman Islands, Morocco, Senegal, Haiti, the Philippines, South Sudan, Jordan and Mali; and (ii) removes Ghana, Botswana, Mauritius, the Bahamas and Iraq.
The Delegated Regulation also outlines the steps being taken by Turkey to address the strategic deficiencies in its AML/CTF regime. In the light of the progress it has made, the European Commission has decided that there is no need to adopt further measures against Turkey under Article 9 at this stage.
The Delegated Regulation will be submitted to the European Parliament and the Council to consider for approval.
EBA launches the European Union’s central database for anti-money laundering and counter-terrorism financing
On 31 January 2022, the European Banking Authority (EBA) launched its central database for anti-money laundering and counter-terrorist financing (AML/CFT).
This European reporting System for material CFT/AML weaknesses, EuReCA, will be central to coordinating efforts by competent authorities and the EBA to prevent and counter money laundering and terrorist financing (ML/TF) risks in the Union.
EuReCA will contain information on material weaknesses in individual financial institutions in the EU that competent authorities have identified. Competent authorities will also be reporting the measures they have imposed on financial institutions to rectify those material weaknesses.
The EBA will use information from EuReCA to inform its view of ML/TF risks affecting the EU financial sector. It will also share information from EuReCA with competent authorities as appropriate, to support them at all stages of the supervisory process and, in particular, should specific ML/TF risks or trends emerge. In this regard, EuReCA will act as an early warning tool, which will help competent authorities to act before ML/TF risk crystallise.
EuReCA has been established based on provisions in article 9a (1) and (3) of the EBA Regulation and in the draft draft Regulatory Technical Standards (RTS) on a central database on AML/CFT in the EU that were published on the EBA’s website on 20 December 2021.
EuReCA will not start to collect personal data until the approval of the draft RTS by the European Commission. Once approved, the RTS will be directly applicable in all Member States. EuReCA will start to receive data in Q 1 2022.
FUND REGULATION
AIFMD
ESMA report highlights liquidity concerns for alternative investment funds
On 3 February 2022, ESMA published its fourth annual statistical report on the Alternative Investment Fund (AIF) sector. The report covers the 30 members of the European Economic Area (EEA30) and shows that the sector increased by 8% in 2020 to EUR 5.9trn in net assets from EUR 5.5trn in 2019
The main risk faced by the sector relates to a mismatch between the potential liquidity of the assets, and the redemption timeframe offered to investors. While at aggregate level this mismatch is unlikely to materialise, it indicates that AIFs with a liquidity deficit would face challenges if large redemptions were to occur. This is particularly the case for real estate funds and funds of funds.
The main findings are:
- The size of the EEA AIF market continued to expand to reach EUR 5.9tn in Net Asset Value (NAV) at the end of 2020, a 8% increase from 5.5trn in 2019. The growth of the EU AIF market results from the launch of new AIFs in 2020 and positive valuation effects;
- Funds of Funds (FoFs) account for 15% of the NAV of EU AIFs, at around EUR 0.9tn (+4% compared with EUR 842bn in 2019). At the very short end, investors can redeem 40% of the NAV within one day, whereas only 14% of assets could be liquidated within this time frame. If large redemptions were to occur, AIFs would face challenges due to this liquidity mismatch;
- Real Estate Funds account for 13% of the NAV of AIFs, at EUR 766bn. They continued to grow in 2020 (+9% compared to 2019). RE funds are exposed mostly to illiquid physical assets which take time to sell, so liquidity risk in RE funds remains a concern;
- Brexit – following the withdrawal of the United Kingdom (UK) from the EU, the size of the EEA30 Hedge Fund sector has declined to only EUR 89bn (2% of the NAV of all AIFs), from EUR 354bn in 2019 (including the UK). Leverage remains very high, particularly for some strategies highly reliant on derivatives;
- Private Equity Funds account for 6% of the NAV of all AIFs, or EUR 363bn, and experienced the largest growth in 2020 (+29% compared with 2019). They follow a range of strategies and are almost exclusively sold to professional investors;
- Other AIFs account for 62% of the NAV of EU AIFs, at around EUR 3.7tn (+4% compared with 2019). The category covers a range of strategies, with fixed income and equity strategies accounting for 68% of the NAV and an additional residual category amounting to 29%. Other AIFs are mainly sold to professional investors, although there is a significant retail investor presence; and
- EU Member States can allow non-EU asset managers to market alternative funds at national level under the National Private Placement Regime (NPPR), even though such funds cannot subsequently be passported to other Members States. The market for such non-EU funds is comparatively large: The NAV of non-EU AIFs marketed under NPPRs’ rules amounts to EUR 1.3tn, i.e. more than one-fifth of the AIF market. NPPR fund marketing is concentrated in a small number of Member States, and 99% of investors are professional investors.
ESMA will continue to report annually on its analysis.
UCITS and AIFS
ESMA launches a common supervisory action with NCAs on valuation of UCITS and open-ended AIFs
On 20 January 2022, ESMA launched a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the valuation of UCITS and open-ended Alternative Investment Funds (AIFs) across the EU.
The CSA aims to assess compliance of supervised entities with the relevant valuation-related provisions in the UCITS and AIFMD frameworks, in particular the valuation of less liquid assets, and will be conducted throughout 2022.
The CSA will focus on authorised managers of UCITS and open-ended AIFs investing in less liquid assets i.e.: unlisted equities, unrated bonds, corporate debt, real estate, high yield bonds, emerging markets, listed equities that are not actively traded, bank loans.
The current economic conditions underline the importance of assessing valuation risks which may pose a potential threat to financial stability and this exercise is of utmost importance to effectively address this risk at EU level.
(This is the third CSA that ESMA and NCAs have launched on asset management. The first two covered UCITS liquidity risk management and supervision of costs and fees in UCITS.)
SUSTAINABLE FINANCE
ESG ratings providers
ESMA call for evidence on ESG rating providers in the EU
On 3 February 2022, ESMA launched a call for evidence on market characteristics for ESG rating providers in the EU.
The call for evidence’s purpose is to develop a picture of the size, structure, resourcing, revenues and product offerings of the different ESG rating providers operating in the EU. The call is mainly addressed to three target groups: (i) ESG rating providers; (ii) users of ESG ratings; and (iii) entities subject to rating assessment of ESG rating providers.
This call for evidence is intended to complement a separate consultation to be launched by the European Commission, that will seek stakeholder views on the use of ESG ratings by market participants and the functioning and dynamics of the market.
Comments received by 11 March 2022 will be considered by ESMA.
EU Taxonomy
Complementary Delegated Act covering certain nuclear and gas activities is approved
On 2 February 2022, the European Commission approved a draft Delegated Regulation covering economic activities in the natural gas and nuclear energy sectors, and providing for specific disclosure requirements for natural gas and nuclear energy sectors under the Taxonomy Regulation.
This Complementary Climate Delegated Act: (i) introduces additional economic activities from the energy sector into the EU Taxonomy.
The text sets out clear and strict conditions subject to which certain nuclear and gas activities can be added as transitional activities to those already covered by the first Delegated Act on climate mitigation and adaptation, applicable since 1 January 2022. These stringent conditions include: (a) for both gas and nuclear, that they contribute to the transition to climate neutrality; (b) for nuclear, that it fulfils nuclear and environmental safety requirements; and (c) for gas, that it contributes to the transition from coal to renewables; and (ii) introduces specific disclosure requirements for businesses related to their activities in the gas and nuclear energy sectors.
The Complementary Delegated Act will enter into force and apply as of 1 January 2023.
CySEC DEVELOPMENTS
C483 ESMA & EBA Joint Guidelines (ESMA35-36-2319) on the assessment of the suitability of members of the management body and key function holders
On 18 January 2022, Circular C483 was issued by CySEC, to remind Cyprus Investment Firms entities that the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published on 2 July 2021 their revised final joint Guidelines on the assessment of the suitability of members of the management body and key function holders, applicable from 31 December 2021. CySEC has adopted these Guidelines by incorporating them into its supervisory practices and regulatory approach.
C484 Registration of RAIFs with the CySEC RAIF Register; Amendment of Directive D124-01
On 26 January 2022, Circular C484 was issued by CySEC, to inform the External Managers of Registered Alternative Investment Funds (RAIFs) that CySEC has amended the Directive for the registration and deregistration of RAIFs in the RAIFs register (DI124-01). Within one (1) month from the date of submission of the application CySEC shall examine and verify whether the authorisation of the External Manager covers the management of an AIF with the investment policy of the respective RAIF. Where it does, CySEC registers the RAIF in question with the CySEC RAIFs Register and informs iits external manager.
Practical Guide for the submission of the Prudential forms under IFR/IFD
On 26 January 2022, the Practical Guide for the submission of the Prudential forms under IFR/IFD was issued by CySEC, to provide Cyprus Investment Firms guidance for the electronic submission of the forms related to the new prudential framework (IFD/IFR). The guide provides information with respect to the reporting frequency, reference dates; submission of supporting documentation (management accounts) etc. This guide should be read in conjunction with the Practical guide for the implementation of IFR/IFD.