INVESTMENT SERVICES & CAPITAL MARKETS
ESMA issues an opinion on product intervention measures on “turbos”
On 8 June 2021, ESMA issued an opinion on product intervention measures communicated by The Netherlands Authority for the Financial Markets (AFM).
These measures concern “turbos” which are high-risk leveraged products with which investors speculate that the prices of the underlying asset, such as a share, an index or a currency, will rise or fall.
ESMA’s opinion concludes that the proposed measures are justified and proportionate.
Furthermore, ESMA’s opinion encourages all National Competent Authorities (NCAs) to monitor turbos in their respective markets to assess whether similar risks for retail investors as those identified by the AFM could arise there.
ESMA and EBA publish final guidance on fit and proper requirements
On 1 July 2021, ESMA and the European Banking Authority (EBA) published their revised final joint Guidelines (the “Guidelines”) on the assessment of the suitability of members of the management body and key function holders. The Guidelines have been developed according to Article 91 (12) of the CRD and Article 9 of the revised Markets in Financial Instruments Directive (MiFID 2).
These Guidelines take into account the amendments introduced by the revised Capital Requirements Directive (CRD V) and the Investment Firms Directive (IFD), and their effect on the assessment of the suitability of members of the management body, in particular with regard to money laundering and financing terrorism risks, and gender diversity.
The Guidelines will apply from 31 December 2021, when the 2017 joint Guidelines will be repealed. The Guidelines will apply to National Competent Authorities across the EU, as well as to institutions on a solo and consolidated basis.
Securitisations Regulation (SECR)
ESMA registers European Datawarehouse GmbH and Secrep B.V. as securitisation repositories
On 25 June 2021, ESMA approved the registrations of the first two securitisation repositories (SRs) under the Securitisation Regulation (SECR). The registration decisions will become effective on 30 June 2021.
The following entities are registered as SRs for the European Union:
- European DataWarehouse GmbH based in Germany; and
- SecRep B.V. based in the Netherlands.
Reporting to Securitisation Repositories will start on 30 June 2021
The registered SRs can be used by reporting entities to fulfil their obligations under SECR. The SRs are required to provide direct and immediate access free of charge to investors and potential investors as well as to all the entities listed in Article 17(1) of SECR to enable them to fulfil their respective obligations.
As of 30 June, reporting entities must make their reports available through one of the registered SRs and are encouraged to immediately contact one of the registered SRs.
Delegated Regulation extending transitional period for exempting pension scheme arrangements from EMIR clearing obligation published
On 16 June 2021, Commission Delegated Regulation (EU) 2021/962 extending the transitional period for exempting Pension Scheme Arrangements (PSAs) from the clearing obligation under EMIR Article 89(1) was published in the Official Journal.
This follows a recommendation from ESMA in its report published on 17 December 2020, that further development of the solutions to mitigate challenges faced by PSAs is needed before the clearing obligation applies.
The transitional period is extended until 18 June 2022. The Delegated Regulation entered into force on 17 June (the day following its publication in the Official Journal).
ESMA launches 2021 central counterparties stress test
On 7 June 2021, ESMA published the framework for its fourth Stress Test for Central Counterparties (CCPs).
ESMA, as required by the European Markets Infrastructure Regulation (EMIR), initiates and coordinates this exercise to assess the resilience and safety of recognised European Union (EU) and Tier 2 Third Country CCPs (TC-CCPs), to adverse market developments and to identify any potential shortcomings.
The 2021 Stress Test addresses credit and concentration risks, and uses improved methodologies, including lessons learned from previous exercises, such as assessing the combination of concentration costs and credit losses when liquidating defaulting portfolios or including an intraday exercise for credit. For the first time, and in line with ESMA’s mandate, the exercise also covers operational risk.
The publication of the final report and results is scheduled to take place in H2 2022.
European Commission, European Central Bank Banking Supervision, European Banking Authority and ESMA encourage market participants to cease all LIBOR settings
On 24 June 2021, the European Commission (EC), the European Central Bank in its banking supervisory capacity (ECB Banking Supervision), the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) issued a joint statement in which they strongly encouraged market participants to use the time remaining until the cessation or loss of representativeness of USD LIBOR, GBP LIBOR, JPY LIBOR, CHF LIBOR and EUR LIBOR to substantially reduce their exposures to these rates.
The statement also encouraged market participants to cease using the 35 LIBOR settings, including USD LIBOR, as a reference rate in new contracts as soon as practicable and by 31 December 2021 at the latest. Participants are also called on to limit the use of any LIBOR setting published under a changed methodology and to include robust fallback clauses nominating alternative rates in all contracts referencing LIBOR.
The EC, ESMA, ECB Banking Supervision and the EBA will monitor the situation and LIBOR exposures closely.
Money Market Funds
European Systemic Risk Board issues a note on Systemic vulnerabilities in Money Market Funds
On 1 July 2021, the European Systemic Risk Board (ESRB) published a note on money market funds (MMFs) which sets out the ESRB’s analysis of systemic vulnerabilities in MMFs and preliminary policy considerations on how to reform MMFs.
There is an underlying tension between the two primary economic functions of MMFs: they offer on-demand liquidity to investors and provide short term funding to borrowers (mainly EU banks), but cannot dispose of their assets easily in all market conditions. This tension might become of systemic concern especially during market stress, as observed at the onset of the COVID-19 pandemic. In such circumstances, MMFs can face both higher redemption requests from investors and a lack of sufficient portfolio liquidity to meet this increased demand. This is particularly the case for those MMFs that invest primarily in non-public debt. The tension can also be exacerbated by funds that offer a quasi-stable net asset value, as these face an additional valuation constraint in already challenging circumstances.
The issues note outlines the preliminary policy considerations on how to reform MMFs in the specific context of the EU’s regulatory framework. The ESRB policy work will focus on those policy options that would address vulnerabilities within MMFs themselves, being mindful of wider work underway internationally. There are three key desired outcomes of this policy work. First, to remove first-mover advantages for investors, which was also a key consideration in the previous ESRB Recommendation of 2012. Second, not to limit the proposals to specific type of funds but to consider the vulnerabilities of the entire sector. Third, to ensure the resilience and functioning of MMFs without the need for central banks to step in during crisis.
The ESRB will further analyse a range of issues, including the wider markets in which MMFs operate, the behaviour and expectations of investors in MMFs, as well as the structure of MMFs and the liquidity management tools available to them, with a view to adopting a Recommendation by the end of 2021.
European Commission adopts amendments to Delegated Regulation on requirements for assets received by MMFs as part of reverse repurchase agreements
On 15 June 2021, the European Commission (EC) adopted a Delegated Regulation (the “amending Regulation”) amending Commission Delegated Regulation (EU) 2018/990 in respect of requirements for assets received by money market funds (MMFs) as part of reverse repurchase agreements.
In accordance with Article 2 of Commission Delegated Regulation (EU) 2018/990 eligible investments in reverse repurchase agreements by managers of MMFs are subject to supplementary qualitative and quantitative requirements, including a specific adjustment to the value of an asset. However, those requirements do not apply to transactions entered into with credit institutions, investment firms and insurance undertakings that are established in the EU or that are covered by an equivalence decision.
The amending Regulation specifies the relevant provisions in the CRR, MiFID II and Solvency II on which equivalence decisions should be adopted for the exemption to be applied in relation to these entities. The EC states that it adopted the amending Regulation following a request by ESMA to clarify the legal bases for the references to equivalence in Article 2(6). If neither the European Parliament nor the Council object, the amending Regulation will be published in the Official Journal and enter into force 20 days later.
Official translation of guidelines on stress test scenarios under the MMF Regulation published
On 29 June 2021, ESMA published the official translations of its guidelines on stress test scenarios produced under Article 28 of the Regulation on money market funds (MMF Regulation).
The guidelines apply to competent authorities, MMFs and managers of MMFs as defined in the MMF Regulation. The guidelines establish common reference parameters for the stress test scenarios to be included in the stress tests conducted by MMFs or managers of MMFs in accordance with Article 28 of the MMF Regulation.
The guidelines will apply from two months after the date of their publication on ESMA’s website in all EU official languages (30 August 2021). Parts of the guidelines written in red text apply from the dates specified in Articles 44 and 47 of the MMF Regulation.
Alternative Investment Funds (AIFs) and UCITS
First ESMA report on national rules governing fund marketing
On 1 July 2021, ESMA published its first report on national rules on marketing requirements and marketing communications under the Regulation on cross-border distribution of funds.
In this report, ESMA provides an overview of the marketing requirements across Member States, and analyses the effects of national laws, regulations and administrative provisions governing the marketing of investment funds. The report is based on responses provided by National Competent Authorities (NCAs) to two questionnaires prepared by ESMA.
The key findings are:
- National laws, regulations and administrative provisions governing marketing requirements are usually based on the transposition of the AIFMD and the UCITS Directive, although NCAs’ responses showed that some additional national requirements may be applicable.
- Only a very limited number of NCAs carry out ex-ante or ex-post verification or marketing communications.
- It is expected that greater harmonisation of the marketing requirements will be achieved after the transposition of the Directive on cross-border distribution of collective investment undertakingsby 2 August 2021.
ESMA will submit to the European Parliament, the Council and the Commission a new iteration of the report in two years.
ITS on cross-border marketing of AIFs and UCITS published
On 15 June 2021, Commission Implementing Regulation (EU) 2021/955 laying down implementing technical standards (ITS) for the application of the Regulation on the cross-border distribution of investment funds was published in the Official Journal.
- determine standard forms, templates and procedures for the publications and notifications that national competent authorities (NCAs) are required to make in relation to national provisions concerning marketing requirements applicable within their jurisdiction (Article 5(3));
- determine standard forms, templates and procedures for the publications and notification that NCAs are required to make in relation to national provisions concerning fees and charges levied by them in relation to activities of AIFMs, EuVECA managers, EuSEF managers and UCITS management companies; and
- specify the information to be communicated, as well as the standard forms, templates and procedures for communication of the information by the NCAs which is necessary for the creation and maintenance of the central database on cross-border marketing of AIFs and UCITS and the technical arrangements necessary for the functioning of the notification portal into which each NCA shall upload all documents necessary for the creation and maintenance of such central database.
The Implementing Regulation will enter into force on 5 July (20 days after publication in the Official Journal). It will apply from the date of entry into force, with some exceptions. Articles 1 and 3(1) apply from 2 August, and Article 5 applies from 2 February 2022.
ESMA guidelines on Article 25 of the Alternative Investment Fund Managers Directive (AIFMD)
On 23 June 2021, ESMA published guidelines on Article 25 of the AIFMD.
ESMA notes that the objectives of the guidelines are to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision and to ensure the common, uniform and consistent application of Article 25 of the AIFMD. In particular, they relate to the assessment of leverage-related systemic risk and aim to ensure that competent authorities adopt a consistent approach when assessing whether the condition for imposing leverage-related measures are met.
The guidelines will apply from two months after the date of publication of the guidelines on ESMA’s website in the EU official languages.
European Commission adopts Taxonomy Climate Delegated Act
On 4 June 2021, the European Commission confirmed that it had adopted Commission Delegated Regulation supplementing the Taxonomy Regulation relating to climate change mitigation and adaptation. The final text of the Delegated Act, alongside its Annexes (Annex 1 and Annex 2) were also been published. The Delegated Act will enter into force 20 days after it has been published in the Official Journal, and it will apply from 1 January 2022. (Please see Regulatory Updater May 2021)
FATF reports and recommendations on opportunities and challenges of new technologies for AML/CFT
On 1 July 2021, the Financial Action Task Force (FATF) published a report on the opportunities and challenges of new technologies for anti-money laundering and counter terrorist financing measures to raise awareness of relevant progress in innovation and specific digital solutions.
New technologies have the potential to make anti-money laundering (AML) and counter terrorist financing measures (CFT) faster, cheaper and more effective. They can improve the implementation of FATF Standards to advance global AML/CFT efforts, ensure financial inclusion and avoid unintended consequences such as financial exclusion. As the global AML/CFT standard setter, the FATF is strongly committed to keeping abreast of innovative technologies and business models in the financial sector and to ensuring that the global standards remain up-to-date and can enable “smart” financial sector regulation that both addresses risks and promotes responsible innovation.
The increased use of digital solutions for AML/CFT based on Artificial Intelligence (AI) and its different subsets (machine learning, natural language processing) can potentially help to better identify risks and respond to, communicate, and monitor suspicious activity. At public sector level, improved live (real-time) monitoring and information exchange with counterparts enable more informed oversight of regulated entities, helping to improve supervision. At private sector level, technology can improve risk assessments, onboarding practices, relationships with competent authorities, auditability, accountability and overall good governance whilst cost saving.
The report identifies challenges related to the development, adoption and application of these innovative solutions or practices. Many of these challenges are due to outstanding operational and regulatory constraints, such as legacy AML/CFT compliance systems and traditional regulatory frameworks and oversight mechanisms. The complexities and costs involved in replacing or updating legacy systems make it challenging to exploit the potential of innovative approaches to AML/CFT for both industry and government.
Increased communication and cooperation between the public and private sector, informed by the type of information and analysis provided by this report, together with an emphasis on responsible adoption of new technologies and effectiveness, in particular with regard to data protection regulations, will be key to overcoming these challenges and fully realising the promise of responsible innovation to strengthen the effectiveness of AML/CFT measures.
ECA report on EU efforts to fight money laundering (ML) in banking sector
On 29 June 2021, the European Court of Auditors (ECA) published a report on EU efforts to fight ML in the banking sector. The ECA found that:
- Overall, there is institutional fragmentation and poor co-ordination at the EU level when it came to actions to prevent ML/TF and take action where risk was identified. In practice, AML/CFT supervision still takes place at national level with an insufficient EU oversight framework to ensure a level playing field;
- the European Commission (EC) is obliged to publish a list of third countries which pose an ML threat to the internal market – the ECA found that there were shortcomings in relation to communication with listed third countries, and a lack of cooperation by the European External Action Service;
- the EC carries out a risk assessment for the internal market every two years, which does not indicate changes over time, lacks a geographical focus, and does not prioritise risk effectively;
- the EC was slow to assess Member States’ transposition of directives due to poor-quality communication by Member States and limited resources at the EC;
- European Banking Authority (EBA) staff carried out thorough investigations of potential breaches of EU law, but the ECA found evidence of lobbying of its Board of Supervisors who were part of a deliberative process; and
- the ECB has made a good start in sharing information with national AML/CFT supervisors, although some decision-making procedures were slow. The quality of material shared by the supervisors also varied considerably due to national practices, and the EBA is developing updated guidance.
The ECA sets out recommendations in relation to these findings to the EC, the EBA and the ECB.
FATF consults on revisions to Recommendation 24 on transparency and beneficial ownership of legal persons
On 28 June 2021, FATF launched a consultation on potential amendments to Recommendation 24 on transparency and beneficial ownership of legal persons.
FATF’s objective is to strengthen the international standard on beneficial ownership of legal persons so as to ensure greater transparency about the ultimate ownership and control, providing competent authorities timely access to adequate, accurate and up-to-date beneficial ownership information, and to take more effective action to mitigate the risks of misuse.
FATF is seeking comments on:
- Risk-based approach for foreign legal persons – In light of the use of cross-border ownership structures to conceal beneficial ownership, FATF is considering whether all countries should apply measures to understand the risk posed by all types of legal person created in the country (as currently required) and also to certain foreign-created legal persons, and to take appropriate steps to manage and mitigate these risks. To manage the task regarding foreign-created legal persons which countries should understand and mitigate the risk, FATF is considering to limit the scope to foreign-registered legal persons which have sufficient links with the countries.
- Multipronged approach to collection of Beneficial Ownership information – The FATF recommends that countries use a multi-pronged approach to ensure that beneficial ownership information is available to competent authorities. FATF is evaluating countries’ experience to date of the creation and operation of beneficial ownership registries, and is considering what core elements should be included in a multi-pronged approach, and what supplementary measures should be considered for inclusion. This includes the benefits to law enforcement and other competent authorities of registries and other approaches, the costs and compliance burden associated with beneficial ownership registries to governments and companies; the value of information; the risks around the introduction of registries and other approaches, and other requirements and challenges for each of these approaches to be successful.
- Access to information – FATF is considering who should have access to beneficial ownership information, whether held by a registry or another mechanism, and how confidentiality and privacy should be protected.
- Bearer Shares and Nominee arrangements – FATF is considering possible measures to strengthen controls on bearer shares and nominees to prevent them from being used to conceal the beneficial owners of legal persons. This includes potential prohibition on the issuance of new physical bearer shares and a requirement for existing physical bearer shares to be immobilised or converted before any associated rights can be exercised. FATF is also considering requiring nominee directors and shareholders to proactively declare their status and (for non-regulated nominees) their nominator to the company and to a registry or financial institution.
The consultation closes on 20 August 2021.
FATF June 2021 Plenary Outcomes
On 25 June 2021, FATF published the outcomes of its fourth plenary under the German Presidency of Dr. Marcus Pleyer. FATF finalised work in a number of areas:
- Money Laundering from Environmental Crime
- Ethnically or Racially Motivated Terrorism Financing
- Virtual Assets: Adoption of Second 12-Month Review of Implementation
- Exploring the Opportunities and Challenges of Digital Transformation of AML/CFT
- Operational Challenges Associated with Asset Recovery
- Strengthening the FATF Standards on Beneficial ownership – public consultation
FATF updates its list of jurisdictions under increased monitoring
On 25 June 2021, FAFT issued its revised list of jurisdictions under increased monitoring which are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”. The FATF identifies additional jurisdictions, on an on-going basis, that have strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.
In October 2020, the FATF decided to recommence work, paused due to the COVID-19 pandemic, and to identify new countries with strategic AML/CFT deficiencies and prioritise the review of listed countries with expired or expiring deadlines of action plan items. The following countries had their progress reviewed by the FATF since February 2021: Albania, Barbados, Botswana, Cambodia, Cayman Islands, Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Uganda, and Zimbabwe. FAFT has provided updated review statements for these countries. Following review, the FATF now also identifies Haiti, Malta, Philippines, and South Sudan.
ESMA 2020 ANNUAL REPORT
On 16 June 2021, ESMA published its Annual Report, which reviews its achievements in 2020 against its priorities and objectives in meeting its mission of enhancing investor protection and promoting stable and orderly financial markets in the European Union.
The Report provides an overview of the work carried out by ESMA in 2020, following the entry into force of the revised ESMA Regulation and the amendments to the European Market Infrastructure Regulation (EMIR 2.2), updating ESMA’s governance and introducing new mandates for the organisation, which are shifting ESMA’s focus towards supervisory convergence. In addition to fulfilling its mandates, ESMA had to respond to the combined effects on financial markets of the COVID‑19 pandemic and the United Kingdom’s withdrawal from the European Union.
Highlights of 2020
ESMA’s 2020 key achievements included its work on:
- Promoting Supervisory Convergence
- Fast-track peer review on Wirecard – enhanced peer review framework;
- First common supervisory action (CSA) on the application of the MiFID II requirements on the assessment of appropriateness and execution requirements related to investor protection;
- Identification of union specific supervisory priorities (USSP); and
- ESMA’s report on liquidity risk in investment funds.
- Assessing risks to investors, markets and financial stability
- Annual statistical report series on EU securities markets, retail investment markets, AIF markets and derivatives markets; and
- Ensuring quality of data reported to ESMA.
- Completing a Single Rulebook for EU financial markets
- Contribution to the European Commission’s CMU’s action plan;
- Publication of ESMA’s strategy on sustainable finance. The key priorities include transparency obligations, risk analysis on green bonds, ESG investing, convergence of national supervisory practices on ESG factors, taxonomy and supervision; and
- Contribution to the European Commission’s digital finance strategy.
- Directly supervising specific financial entities
- Establishment of the Central Counterparty (CCP) Supervisory Committee;
- Enforcement cases for breaches of the Credit Rating Agency Regulation;
- Trade repositories landscape reshaped (withdrawals and additions); and
- Thematic report on collateralised loan obligations.
Consultation Paper (CP-01-2021) on regulating the service of promoters of applications and other issues in relation to the Administrative Service Providers Law of 2012
On 10 of June 2021, CP-01-2021 was issued by CySEC, on a proposed introduction of specific rules and obligations on Promoters of Applications that engage in the submission and promotion of applications for the granting of a license to a regulated entity of CySEC or other material changes.
This regulatory initiative is designed to enhance the quality of submitted applications by requiring the Promoters of Applications to carry out due diligence and KYC procedures to clients that wish to apply for a license and abide with certain code of conduct rules. This regulatory initiative is expected to enhance the use of anti-money laundering procedures when promoting investments and ultimately increase the quality of services provided to regulated entities and the entities undergoing the procedure of being granted a license.
The deadline for the submission of responses was on the 1st July 2021.
Consultation Paper (CP-02-2021) on regulating the provision of Investment Fund Administration Services
On 16 of June 2021, CP-02-2021 was issued by CySEC, on a proposed draft law regulating the profession of investment fund administrations and the provision of the relevant services in or from Cyprus.
The proposed law relates to the provision of back-office services in the context of collective portfolio management, i.e., management of investment funds, also known as UCIs and it shall apply to and govern the operations of the entities operable in or from Cyprus and offer relevant administration services to UCIs established in Cyprus or abroad.
The deadline for the submission of responses was extended through CySEC’s announcement , dated 30 June 2021, until the 20th of July 2021.
Directive for the prevention and suppression of money laundering and terrorist financing (beneficial ownership register of express trusts and similar legal arrangements) (Directive 257/2021)
On 18 of June 2021, Directive 257/2021 (in Greek only) was published on the beneficial ownership and register of express trusts and similar legal arrangements.
The Directive provides information and guidance regarding the registration of express trusts and similar arrangements in CySEC’s Beneficial Ownership Register.
Directive for the prevention and suppression of money laundering and terrorist financing (Register of Crypto Asset Service Providers) (Directive 269/2021)
Following the recent transposition of AMLD V into Cyprus Law which, among others, brought into scope providers offering services related to crypto-assets, CySEC issued on 25 June 2021 Directive 269/2021 (in Greek only) in relation to the registration and operating conditions of providers of services related to crypto assets.
The Directive provides for the registration procedure and conditions, the operating conditions, the relevant fees and other important rules and obligations.
Directive regarding the granting of credits with margin to retail clients for stock exchange transactions (Directive DI87-11)
On 11 June 2021 Directive DI87-11 (in Greek only), on granting of credits with margin to retail clients for stock exchange transactions, was issued by CySEC.
The Directive provides for the obligations of the CIFs which enter into agreements with retail clients for transactions on transferable securities on a regulated market.