INVESTMENT SERVICES & CAPITAL MARKETS
Trading – Market data
Delegated Regulation amending RTS on MIFID II tick size regime adopted
On 1 February 2023, the European Commission adopted a Delegated Regulation amending the RTS laid down in Delegated Regulation (EU) 2017/588 (RTS 11) as regards the annual application date of the calculation of the average daily number of transactions for shares, depository receipts and exchange-traded funds for the purposes of the tick sizes.
RTS 11 contains the applicable tick size based on the average daily number of transactions (ADNT). Where currently the calculations of the ADNT apply as of 1 April each year, the Delegated Regulation amends the RTS to ensure that they apply as at the first Monday of April of each year instead. This will align the application date of calculations in RTS 11 with the application date of calculations in RTS 1. The European Commission has adopted the Delegated Regulation without consultation, as the amendments are technical in nature.
This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union.
ESMA publishes data for the systematic internaliser calculations
On 1 February 2023, ESMA published the data for the systematic internaliser quarterly calculations for equity, equity-like instruments, bonds and for other non-equity instruments and the consolidated tape provider (CTP) under MIFID II and MIFIR.
ESMA publishes data for the quarterly liquidity assessment of bonds
On 27 January 2023, ESMA published its new quarterly liquidity assessment of bonds. Due to a technical error, the data was published earlier than the usual publication date (1 February 2023). This does not have any impact on the application date. The transparency requirements for bonds deemed liquid will apply from 16 February 2023 to 15 May 2023.
ESMA consults on post-trade transparency
The consultation paper focuses on the new Level 3 guidance that will be included in the manual, which is meant to provide further clarifications on:
- issues related to post-trade transparency to improve the consistency and usability of the information published
- the reporting to ESMA’s Financial Instruments Reference Data System (FITRS) for the performance of the transparency calculations.
The manual will provide a general overview of the post-trade transparency regime for equity, equity-like and non-equity instruments including:
- legal references to Level 1 (MIFIR / MIFID II);
- legal references to Level 2 (RTS 1 and RTS 2);
- legal references to Level 3 (Opinions/Guidelines);
- guidance previously included in published Q&As;
- new Level 3 guidance.
The deadline for comments is 31 March 2023. The final report and the manual will then be published after the end of the consultation period and the end of the 3-month scrutiny period of Parliament and Council for the reviewed RTS 1 and 2.
ESMA and NCAs to look at marketing of financial products
On 16 January 2023, ESMA announced that it was launching a common supervisory action (CSA) with national competent authorities (NCAs) on the application of MIFID II disclosure rules with regard to marketing communications across the European Union. The CSA will be conducted over the course of 2023.
ESMA is aware of the key role that marketing communications and advertisements can play in determining consumer behaviour and influencing investment decisions and is therefore launching this exercise to assess the application by investment firms and credit institutions of the MIFID II requirements on marketing communications.
As part of the CSA, NCAs will review whether marketing communications (including advertisements) are fair, clear and non-misleading and how firms select the target audience for the marketing communications, especially in the case of riskier and more complex investment products.
ESMA is also aware that younger, less experienced investors, are particularly vulnerable when they operate online. For this reason, the CSA will also closely consider marketing and advertising by firms through distribution channels including apps, websites, social media and collaborations with affiliates such as influencers.
Finally, the 2023 CSA will also be an opportunity collect information about possible ‘greenwashing practices’ observed in marketing communications and advertisements.
ESMA believes this initiative and the related sharing of practices across NCAs, will help ensure consistent implementation and application of EU rules and enhance the protection of investors in line with ESMA’s objectives.
Consultation on Guidelines on the system for the exchange of information relevant to fit and proper assessments
On 31 January 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a consultation paper (JC 2022 76) on draft joint Guidelines on the system for the exchange of information when assessing the fitness and propriety requirements.
These Guidelines aim to increase the efficiency of the information exchange between sectoral supervisors by harmonising practices and clarifying how competent authorities should use the information system developed by the three ESAs.
The joint Guidelines apply to competent authorities under the ESAs’ remit and are divided into two main parts:
- The first one focuses on how competent authorities should input the data and use the ESAs’ information system, including on how to search for the fit and proper assessments of persons of interest that had already been made by other competent authorities.
- Once a competent authority has identified that a relevant assessment has been made by another competent authority, the second part of the Guidelines clarifies how they should cooperate to exchange information.
The deadline for the submission of comments on the Consultation Paper is 2 May 2023.
European Commission update on upcoming and ongoing initiatives
On 24 January 2023, the European Commission published a speech given by Mairead McGuinness, European Commissioner for Financial Services, Financial Stability and Capital Markets Union, on its upcoming and ongoing initiatives.
The ongoing initiatives are:
- the European Green Bond, which the European Commission are hopeful will be concluded at the next trilogue
- finishing the negotiations on the anti-money laundering package
- On banking and insurance: finalising packages on Basel, Solvency, Insurance Recovery and Resolution
- On the Capital Markets Union, work continues on the European Single Access Point, the AIFMD, CSDR, MiFID/MIFIR
- With the three latest proposals:
- the Listing Act (making it easier for our companies, particularly smaller ones, to raise capital on exchanges by reducing compliance and listing costs),
- EMIR (to build up a stronger clearing landscape in the Union and reduce our over-reliance on non-EU clearing houses),
- Corporate insolvency (the proposal contains very targeted changes to make insolvency rules more consistent across Member States).
- With the three latest proposals:
Upcoming initiatives are:
- Banking Union, CMDI, Crisis management,
- a regulation on key principles of a Digital euro,
- an open finance framework and the Payment Services Directive review,
- EU Taxonomy: delegated act for four environmental objectives: circular economy; biodiversity; pollution; and water,
- a new Retail Investment Strategy (to include new rules on distribution, information requirements, and financial advice particularly in relation to inducements).
ESAs identify good practices for financial education initiatives on scams, fraud and cyber security
On 12 January 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) published a joint thematic Report on national financial education initiatives on digitalisation, with a focus on cybersecurity, scams, and fraud.
The Report identifies good practices that national competent authorities and other public entities can follow when designing and implementing their financial education initiatives.
Members of the European Parliament (MEPs) adopt rules to facilitate investigations into financial crime
On 12 January 2023, as part of the EU’s push to combat financial crime, MEPs adopted new rules facilitating access to centralised bank registries. The new proposal endorsed by the European Parliament’s Committee on Civil Liberties, Justice and Home Affairs has adopted its report on the proposed Directive amending Directive (EU) 2019/1153 as regards access of competent authorities to centralised bank account registries through the single access point.
It mandates EU Member States to ensure that the information from centralised registries is available through a single access point to be developed and operated by the European Commission. This would ensure more effective investigations into illicit finance by making it easier to retrieve data from centralised bank registries created by the fifth anti-money laundering directive. This way, competent authorities can quickly establish if an individual holds accounts in several EU countries without multiple time-consuming queries.
MEPs emphasise the importance of respecting an individual’s right to privacy, and the principle of data minimisation. They also highlight the need to gather bank account information proportionally to the needs of a specific ongoing investigation and emphasise that searches in the centralised bank registries should only be allowed in cases where the authorities would be allowed to conduct a similar search in national registries.
Next, the full house of the European Parliament will be asked to endorse the mandate for negotiations.
ESMA updates Q&As on application of UCITS
AIFs and UCITS
Costs of retail investment products continue slow decline
In the report ESMA looks at the market between 2012 and 2021 and finds that the costs of investing in the most important retail financial products continued to decline, albeit at a very slow pace.
The key findings in the report are:
- Costs: Costs have declined somewhat, but investors should continue to consider fund fees carefully in their investment decisions. Active UCITS remained more expensive than passive funds and ETFs, such that their net performance was on average lower in comparison. Costs were higher for cross-border funds than those for domestic funds, mainly due to differences in distribution channels.
- Investment value and value-for-money Investors paid around 3,000€ in costs for an investment of 10,000€ over the ten years between 2012 and 2021. This led to a final net value of 18,500€ at the end of this period. Beyond performance and costs, the overall utility that investors can derive from investment products, i.e. their value-for-money, is gaining growing attention. Cost efficiency, as well as product design and quality, determine final investor outcomes.
- Inflation: After more than a decade of low inflation, the recent rise in price levels has started to weigh on investor returns. In addition to the average 3,000€ fund fees paid for a ten-year 10,000€ investment, investors typically lose 2,000€ due to inflation, reducing the net value of that investment to 16,500€. Inflation differences across Member States, measured at the level of the fund domicile, add to the persistent and high differences in fund costs across the EU.
- ESG: While equity, bond and mixed ESG funds outperformed on average their non-ESG equivalents in 2021, results differ across asset classes. In 2021, equity and mixed ESG funds outperformed their non-ESG peers but the performance of ESG bond funds was lower than the performance of non-ESG bond funds. ESG funds remained cheaper than their non-ESG peers, with the exception of equity ESG ETFs which are more expensive compared to non-ESG equity ETFs.
- Structured Retail Products: Total costs were largely attributable to entry costs and varied substantially by country and by pay-off type. Costs of products issued in 2021 increased for a majority of payoff types and issuers compared to products issued in the previous three years.
Cost and performance of retail investment products are key determinants of the benefits and risks for retail investors in the EU. Clear and comprehensive information on retail investment products can help investors assess the past performance and costs of products offered across the EU and foster retail investor participation in capital markets.
ESMA’s report helps to monitor progress in this regard by providing consistent EU-wide information on cost and performance of retail investment products. It also demonstrates the relevance of disclosure of costs to investors, as required by the MIFID II, UCITS and PRIIPs rules and the need for asset managers and investment firms to act in the best interest of investors especially considering their role in manufacturing and distributing investment products.
ECON adopts draft reports on proposed Directive amending AIFMD and UCITS Directive
On 24 January 2023, the European Economic and Monetary Affairs Committee (ECON) (a committee of the European Parliament) published a document (page 8) recording that it has voted to adopt draft reports on the proposed Directive amending AIFMD and the UCITS Directive relating to delegation arrangements, liquidity risk management, supervisory reporting, provision of depositary and custody services, and loan origination by AIFs.
Money market funds
ESMA Guidelines on stress test scenarios under the MMF Regulation
On 27 January 2023, ESMA published the official translations of updated guidelines on stress test scenarios under the Money Market Fund (MMF) Regulation. These guidelines apply to competent authorities, MMFs and managers of MMFs as defined in the MMF Regulation. They relate 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.
The updated guidelines apply from 27 March 2023, two months after their publication. All other parts of the Guidelines already apply from the dates specified in Articles 44 and 47 of the MMF Regulation.
ESMA consults on the review of the methodology on stress test scenarios for Money Market Funds
In light of recent market developments and the COVID-19 related stress of March 2020, the proposed revision of the scenarios relates to the hypothetical changes in the level of liquidity of the assets held in the portfolio of the MMF and the hypothetical macro systemic shocks affecting the economy as a whole.
This Consultation Paper (CP) focuses on the following changes to the current methodology:
- the proposed revision of the liquidity scenario aims to better take into account the interaction between liquidity and redemption pressures, in light of the stress event experienced in March 2020; and
- the proposed revision of the macro scenario intends to better capture the macroprudential impact of the scenario, by including assumptions on the underlying markets and other market participants.
Finally, the CP also presents ESMA’s considerations on a potential climate risk scenario, seeking stakeholders’ feedback on this point.
The consultation closed on 28 April 2023. ESMA will then assess responses with the aim of finalising the Final Report by Q4 2023. The final guidelines on MMF stress tests will also include the calibration of the 2023 stress testing scenario for implementation.
European Long-Term Investment Funds (ELTIFs)
European Parliament to consider amendments to ELTIF Regulation
On 12 January 2023, the European Parliament updated its procedure file on the proposed Regulation amending the European Long-Term Investment Funds (ELTIF) Regulation to indicate that it intends to consider the proposed Regulation during its plenary session on 13 February. The procedure file previously indicated that the European Parliament intended to consider the proposed Regulation on 1-2 February 2023.
Corrigendum to PRIIPs Delegated Regulation
On 12 January 2023, a Corrigendum to Delegated Regulation (EU) 2021/2268 amending the RTS laid down in Delegated Regulation (EU) 2017/653 as regards the underpinning methodology and presentation of performance scenarios, the presentation of costs and the methodology for the calculation of summary cost indicators, the presentation and content of information on past performance and the presentation of costs by packaged retail and insurance-based investment products (PRIIPs) offering a range of options for investment and alignment of the transitional arrangement for PRIIP manufacturers offering units of funds referred to in Article 32 the PRIIPs Regulation as underlying investment options with the prolonged transitional arrangement laid down in that Article, was published in the Official Journal.
The Corrigendum amends the wording of the title that previously omitted part of the reference number.
ESMA issues its first opinion on the draft European Sustainability Reporting Standards
ESMA finds that ESRS Set 1 broadly meets the objective of being conducive to investor protection and of not undermining financial stability.
To bring Set 1 from broadly capable to fully capable of meeting that objective, ESMA advises the European Commission to address selected technical issues set out in the opinion. Most notably, these issues relate to possible improvements of the level of consistency vis-à-vis the requirements of the Corporate Sustainability Reporting Directive and other pieces of EU legislation, important clarifications of definitions and terminology and further guidance on the materiality assessment process. The European Commission will consider ESMA’s technical input as it finalises ESRS Set 1 and adopts it into delegated acts.
The Commission will now consider ESMA’s opinion alongside opinions submitted by the EBA, EIOPA and other public bodies and adopt ESRS Set 1 into delegated acts by 30 June 2023.
Circular C544: Expiry of the extension on the transitional arrangement regarding the obligations to produce Key Information Document for packaged retail and insurance-based investment products (PRIIPs) (in Greek).
On 5 January 2023 the CySEC issued Circular C544 (in Greek) (‘the Circular’) to inform the regulated entities (Investment Firms, ASPs, Fund Managers, Self-Managed Funds, etc.) that the extension on the transitional arrangement regarding the obligations to produce Key Information Document (‘KID’) for packaged retail and insurance-based investment products (‘PRIIPs’) has expired.
Circular C544 has been issued in continuation to Circular C279 that was issued on 10 August 2018. The CySEC notes that the above-mentioned Circulars must be read together.
The CySEC also reminds the regulated entities that Regulation (EU) No 1286/2014 of the European Parliament and of the Council on key information documents for PRIIPs (the ‘Regulation’) entered into force on 1st January 2018 and is directly applicable to all Member States. Particular reference is made to Article 5 of the Regulation, which requires manufacturers of PRIIPs to draw up and publish KIDs before making a PRIIP available to retail investors.
Lastly, the Circular states that as from 1 January 2023, the regulated entities referred to in Paragraphs 3 and 4 of the Circular, are required to draw up and publish a KID in accordance with the requirements of the Regulation.
Circular C545 Publication of CySEC’s reviews of compliance with the reporting obligation in accordance with article 9 of Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories, as amended (“EMIR”).
On 12 January 2023 the CySEC published on its website, Circular C545 that includes its findings following a series of reviews assessing the quality and timeliness of data reporting by regulated entities to Trade Repositories, under article 9(1) of EMIR, as amended.
The reviews identified areas of concern, including:
- Misreporting of details of derivative contracts;
- Incorrect status of derivative contracts;
- Definition of “working day” for the purpose of determining the deadline for reporting;
- Rejections – Delegation of Reporting;
- Reconciliation of reports;
- Use of valid legal entity identifiers for counterparties that are legal entities.
CySEC urges regulated entities to regularly review the procedures established, implemented and maintained in relation to EMIR reporting in order to ensure that the data reported are complete, accurate, consistent, timely and not duplicated.
CySEC further notes that regulate entities not complying with their EMIR reporting obligations will be subject to enforcement action.
Circulars C546 and C547: Introduction of prudential reporting of CIFs through CySEC’s XBRL Portal
On 25 January 2023, CySEC issued Circular C546 to inform all Cyprus Investment Firms (“CIFs”) that from now on the prudential forms should be submitted in XBRL format. In this respect, CySEC established the CySEC XBRL Portal which replaces the current TRS portal for the purpose of the prudential reporting obligation for CIFs. For a limited time, CIFs should submit their prudential forms using both systems (i.e. via the current TRS portal and the new CySEC XBRL Portal).
CIFs were instructed to register to CySEC’s XBRL portal no later than 30 January 2023 as per the instructions of the Manual for Registration and start submissions by 31 January 2023 as per the Manual for Investment Firms Submissions.
Further to Circular C546, CySEC issued Circular C547 to inform all CIFs that the deadline for the submission through CySEC’s XBRL Portal of the prudential reports mentioned in point 5(d) of Circular C546 is extended. Specifically, all Class 2 CIFs were instructed to proceed to the submission of their prudential reporting for the dates 31 March 2022, 30 June 2022 and 30 September 2022 through the CySEC’s XBRL portal by Friday, 10 February 2023.